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Haider-Moranis: Oxford Economics warns that Toronto and Vancouver are comparable to New York and London, where demand can never be met
Published August 13, 2024 • 4 minutes reading time
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The moon hovers over Vancouver's skyline. The west coast city and Toronto resemble global real estate markets like New York and London. Photo by Darryl Dyck /The Canadian Press
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By Murtaza Haider and Stephen Moranis
Everyone knows that Canada needs to build a significant number of new homes to make housing affordable again, but coming up with an acceptable estimate for that is a difficult and hotly debated task.
A recent report from Oxford Economics has revived the ongoing debate with a new estimate that differs from estimates previously provided by the Canada Mortgage and Housing Corporation (CMHC) and the Parliamentary Budget Office (PBO). Despite the differences in estimates, the consensus remains clear: Canada needs to build millions more homes – which may still not be enough to restore affordability in the high-demand markets of Toronto and Vancouver.
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The Oxford report estimates that Canada will need to build 4.2 million new homes between 2024 and 2035 to restore balance to the housing market. This equates to 420,000 homes built annually over the next decade – nearly 70 percent more than the average construction output in recent years.
The 4.2 million estimate has two parts: Nearly 2.9 million homes will be needed to accommodate the new households that will emerge over the decade. Another 1.3 million homes will be needed to address the housing shortage that has accumulated over the years and is discouraging household formation. If your adult children still live with you, they are a prime example of an oppressed household.
The report predicts that home affordability will gradually improve over the next decade as house prices are expected to rise more slowly than household incomes, bringing home ownership back within reach for average households by 2035.
However, this optimistic forecast comes with a significant caveat. While affordability is expected to improve across most of Canada, this may not be the case in the most expensive and most in-demand markets – namely Toronto, Vancouver and other areas where housing prices have soared in recent years. In fact, the report suggests that increasing housing supply in these more expensive markets could inadvertently spur further demand, potentially offsetting the benefits of the additional supply.
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The induced demand argument implies that growth in housing demand – and consequently prices – will exceed expected growth in supply, leaving Canada's high-demand markets relatively unaffordable.
Toronto and Vancouver resemble global housing markets such as New York and London, where demand consistently exceeds supply. This is largely due to physical and administrative barriers that slow construction and limit the type of housing that can be built. The result is persistently high prices and rents.
Oxford Economics claims that the CMHC's estimate that 3.45 million additional housing units would be needed between 2021 and 2030 is overstated. Their analysis suggests that only 1.1 million additional units are needed. For a slightly different period, namely 2024 to 2030, the Parliamentary Budget Office estimates the need at around 0.9 million additional homes.
What is the reason for the differences in estimates? A key factor is the assumptions underlying each calculation. The most important of these is the affordable price threshold. What one organization considers an affordable price may still be unaffordable for another. In addition, CMHC's estimates are explicitly broken down at least to the provincial level, while Oxford Economics only provides national estimates. The nuances of the most populous and unaffordable regional markets can be lost in nationally aggregated estimates.
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The downside of overinvestment in housing is the potential undercapitalization of other productive sectors of the economy, such as machinery, equipment and intellectual property. This argument is compelling, especially given that the increase in investment in the housing sector has been accompanied by a decline in productivity growth – a trend that Wulong Gu, an economist at Statistics Canada, attributes to “a lack of investment” in these other important areas.
The Fraser Institute supports this view, pointing out that from 2014 to 2021, 34.1 percent of total investment in Canada went to housing, compared to 18.5 percent in the U.S. During the same period, investment in other productive sectors, such as intellectual property, was 27.7 percent in the U.S., compared to just 12.6 percent in Canada.
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There is widespread agreement on this: Canada needs to build millions of new homes to restore affordability. Even the Fraser Institute, despite its concerns about productivity, admits that “Canada clearly needs more investment in housing.” If Canada is serious about improving affordability, it must act decisively and boost housing construction now.
Murtaza Haider is associate dean for graduate programs and director of the Urban Analytics Institute at the Ted Rogers School of Management at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. You can reach them through the Haider-Moranis Bulletin website, www.hmbulletin.com.
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