Drop in Housing Starts Projects Badly for Home Affordability

Published August 29, 2023 by Real Estate Leads

It’s a complex answer to give, but it’s the right one if anyone is to ask what is the way to improve housing affordability and address the housing crisis in Canada. It’s increasing housing supply, because as has been explained a thousand times the key reason why housing is overpriced is because demands is outstripping supply nearly a thousand times over. That’s not going to change given the direction the country is taking, and let’s be clear – it’s not a bad direction to be taking. But the numbers that we’re going to see with population growth are going to go hand-in-hand with a worsening housing crisis if nothing is done to increase supply.

What’s needed to make that happen is housing starts, and while there’s been more traction gained there in the last year nation wide for sure it’s not anywhere near what is required. But the first thing that needs to be said is any big increase in the number of housing starts is easier said than done. Labour shortages mean that there simply isn’t the number of qualified tradespeople available for the work, and then there’s one of the biggest roadblocks to building affordable homes these days – the astronomical increases in the price of building materials.

All on top of the slew of taxes and fees required that grow quite regularly in municipalities across Canada. All of which creating an environment where we’re going to have people who in any other instance would qualify for a mortgage and are looking to buy a home. But there’s no home for them to buy. At least not one they can afford. We’ll take this week’s entry to expand on why the decreasing number of new housing starts makes affordability even more unlikely in the future.

Economic Underpinning

Housing starts fell last month (July ’23) and there are many who believe a further slowdown will present itself as economic conditions soften. This trend will not help ease affordability challenges in Canada’s pricey real estate market, and especially for those who are looking to be 1st– time homebuyers. Recent CMHC data backs this up, showing how annual housing starts declined by 10% in July compared to previous months.

A number for that? Only 255,000 of them as of last month in what experts say is a current reality where 1.5 million new homes are estimated to be needed by the start of the next decade. This data continues the trend of ‘gentle easing’ in housing starts, but in contrast to that aggregate new construction continues to be historically high.

The consensus seems to be that a more significant slowdown is coming too, and again that is in large part borne out of construction industry labour shortages, high borrowing and material costs, weak homebuilder sentiment, and softening economic activity being what’s expected. A further expectation is that the Bank of Canada will be taking some degree of comfort in weak sales and housing starts data, especially in the aftermath of a colling economy, stagnant GDP, and core effects of inflationary pressure.

Resilient Price Pressures

What we can see in that is how the painful medicine of interest rate hikes is working to cool down economic growth and bring price pressures to heel. If economic conditions continue to soften it may be a situation where the BoC will keep it’s policy rate at 5%. If that’s the case and housing starts continue to decline then it becomes fairer to state that current trends in home building really aren’t doing much to improve affordability for home buyers.

And we can also expect to see lower housing starts in other regions negatively weighing on future supply too. Everything that this trend possibility portends for the future can – and should – put a negative focus on decision makers who seem to think that the market will rebalance itself naturally and on its own. That said, buyer prerogative plays a role in people finding homes unaffordable too, as there is more affordable housing in Canada but it’s not anywhere near the few major metro urban areas where most people want to live.

And as well all know, want and need are two entirely different things.

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