Canadian politicians are promising to build millions of homes—an unrealistic plan not grounded in reality. The good news is the country doesn’t need millions of homes to correct the housing shortage, according to BMO Capital Markets. In a new report, the Big Six bank argues that decades of underbuilding is a myth, and the issue was manufactured post-pandemic. Consequently, the acute shortage is much smaller than framed, and could be tackled without unrealistic promises.
Canada Is Promising To Build Millions of Houses Based On A Myth
Canadians are under the impression that the country has underbuilt housing for decades. Consequently, the public is demanding that policymakers ramp up housing targets. Politicians have been spending billions in taxpayer funds to stimulate building, but building has collapsed to recession levels. Despite the targets being mocked as unrealistic fantasies, a panicked public is still looking for promises of bigger targets and more spending.
Fortunately, those inflated targets don’t have to be met since it’s a myth perpetuated by bad economics.
“It has become a widely held belief that Canada has a serious housing shortage. Most analysis focuses on housing starts data from CMHC. Today, we look at an alternative data set: the housing stock,” writes Benjamin Reitzes, BMO’s rates & macro strategist.
The data only starts in 2016 but still provides a solid counterpoint to the narrative, he suggests.
Canada Didn’t Have A Housing Shortage, It Was Manufactured Post-Pandemic
Most Canadians recall the country’s housing issues very differently from reality. Prior to 2020, the housing shortages were primarily in cities like Toronto and Vancouver. The narrative shifted in 2020 with low rates, as investors scrambled to pick up as many properties as possible.
“Most of the serious housing shortages only ramped up post-pandemic, when the population surged,” argues Reitzes.
Timelines are blurry in hindsight, but record home sales and price growth occurred in 2021 as a part of the low-rate boom. The country’s population was slow during this period, due to pandemic-travel restrictions. It wasn’t until 2022 that the population began to hit record growth, when home prices began to collapse due to soaring interest rates.
Reitzes’ chart shows the number of people per home. The trend clearly changes in 2022, when the country sees a massive surge of immigration. Policymakers briefly acknowledge that their targets were a destabilizing amount of forced growth.
Source: BMO Capital Markets; Statistics Canada.
It may not sound like good news, but it is. The unrealistically large promises don’t have to be met for the country to return to a stable volume of housing.
“Indeed, the number of people per unit has risen over the past three years, driven by population growth… in order to return the ratio in the chart to 2016 levels, Canada needs another 600k units,” explains Reitzes.
He further adds, “That’s a far cry from calls to build millions of additional units.”
Canada’s Affordability Problem Is Real, But Condos Won’t Fix It
The supply of housing and prices are often discussed in tandem but aren’t as closely related as people think. For example, Greater Toronto rental vacancies are higher than pre-pandemic. Few, if anyone, expects the region to see much lower rents.
Most also believe using taxpayer stimulus to build market housing will improve affordability. However, the stimulus has primarily served as a bailout for inefficient projects, propping up inefficient prices. It consequently has a counterproductive effect. It stimulated excess demand for materials and labor, inflating input costs and preserving higher prices. At the same time, higher input costs made new projects cost-ineffective, ultimately producing fewer new homes.
This has had a counterproductive effect, stimulating excess demand for input costs and making it more difficult to build more housing.
BMO sees the housing shortage in a similar context. “While the extent of the shortage is debatable, that doesn’t mean affordability isn’t a real issue. Lack of suitable supply (think single-family homes with access to transit) is where the trouble lies. Building more condos likely isn’t the solution,” explains the economist.
This isn’t the first time BMO has fired shots at the narrative of a housing supply shortage. When the population surge first began, they argued there were no widespread shortages. They warned that politicians were intentionally trying to manufacture a shortage, intentionally overrunning the housing supply.
We’re not even going to bring up the fact that Canada has overstated its population growth for at least 40 years. Okay, we brought it up but you’ll have to read about it on your own.