Analysis: From boom to glut: Canada’s housing plan could backfire on Trudeau

Construction workers are seen next to a crane as they build houses in Calgary, Alberta, May 31, 2010. REUTERS/Todd Korol/File photo

OTTAWA, May 1 (Reuters) – The Canadian government’s plan to ease runaway house prices by rapidly accelerating the pace of home construction risks raising construction costs in the short term and could lead to a supply glut. in the long term, experts said.

Vowing to double housing construction to keep up with population growth and address a shortfall that has helped fuel a housing boom, Prime Minister Justin Trudeau’s Liberals last month outlined plans to build 3.5 million of homes over the next decade.

But experts argue that Canada’s housing shortage is not as acute as the government suggests, noting that starts are running at historic levels, around 250,000 per year, with a record number of units under construction, although completions are delayed.

“I think we definitely need a new supply to meet the increasing growth in households as a result of immigration. I think the 3.5 million is a complete exaggeration,” said Steve Pomeroy, a housing policy consultant and professor at the University of Carleton in Ottawa.

There are very real risks in trying to force the pace of construction too quickly, he added.

“The consequence, if we try to increase it, is that we’re going to run into a bunch of supply chain issues — labor, land and materials — and actually push house prices even higher,” Pomeroy said.

Alarm bells are already ringing in Canada’s construction industry, which is facing a severe worker shortage and retirement crisis, not to mention rising costs for wood and other raw materials due to the global supply chain crisis. supply. read more

Housing construction also generally falls under the jurisdiction of provincial and municipal governments, making it difficult to develop a national strategy.

National home prices have more than doubled since Trudeau took office in late 2015, and earnings have far outpaced those of the other G7 peers from the United States and Canada over the past 15 years.

Rising prices have made homes in cities like Toronto and Vancouver unaffordable for many residents, prompting authorities to take steps to ease the pressure. The Trudeau government recently announced a two-year ban on foreign buyers.

“We simply haven’t had enough housing supply in Canada to reflect the dramatic increase in our population compared to our G7 partner countries,” Canada’s Housing Minister Ahmed Hussen said in an interview.

Hussen pointed to OECD data showing that Canada has fewer homes per 1,000 people than the G7 average. The existing deficit amounts to around 1.8 million homes, according to Scotiabank estimates.

With immigration poised to increase and more young people forming new homes, the current rate of construction is barely “narrowing” that gap, said Bob Dugan, chief economist at Canada Mortgage and Housing Corporation, the national housing agency.

“It would take 36 years to get there at the current rate of housing starts,” Dugan told reporters late last month. “And we have some internal estimates that suggest the need is much higher than the 1.8 million” forecast by Scotiabank.

But critics of that assessment say Canada needs fewer households overall because it has more people per household than the G7 average, due to young children and intergenerational living. And Canada’s household-to-population ratio is on par with the United States and the United Kingdom, which haven’t seen nearly the same price appreciation.

“Count me skeptical in terms of massive supply shortages that exist, perhaps outside of some major hubs,” said Doug Porter, chief economist at BMO Economics.

A more intense construction blitz also risks oversupplying the market. The last time Canadian house prices fell for a significant period was in the early 1990s, after rapid price gains in the previous decade led to a construction boom and subsequent oversupply. .

With rising interest rates cooling demand and housing starts at elevated levels, it’s a situation that could repeat itself, to some extent, if construction picks up too much.

“It’s very, very possible that you end up with oversupply,” Porter said. “I personally don’t lose much sleep over it… But I wouldn’t completely rule it out as a concern.”

Reporting by Julie Gordon in Ottawa Editing by Denny Thomas and Paul Simao

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