Planners should never forget that more housing construction is needed

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Millicent Wong
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Public planners must not lose sight of housing construction, because the housing deficit has already reached millions

Homes under construction in a development in Langford, British Columbia. Homes under construction in a development in Langford, British Columbia. Photo by James MacDonald/Bloomberg Files

Governments and housing experts are calling for much more housebuilding to halt rapid price increases over the decade, but no one seems to agree on how much is needed to restore balance to housing markets.

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Rebalancing housing markets could mean different things to different stakeholders. As a result, estimates of new housing beyond the business-as-usual scenario can also vary widely.

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A balanced housing market should imply at least moderate price fluctuations and that any price increases should keep pace with changes in median household income. That means there are enough new and existing homes available to meet demand when credit conditions are neither lax nor tight. Such a balancing act is difficult to achieve.

An alternative view of a balanced housing market can be based on demographic data. Whether residential construction is keeping pace with the new demand can be seen, for example, from the rate of new households, also known as the headship rate. Such a consideration could eliminate any concern about house prices, which may rise or fall while housing construction rates appear to be in line with new household formation.

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A backdoor link between headship rates and property prices also requires our attention. The headship rate may decrease as younger adults stay longer with their parents as housing becomes increasingly out of reach for younger cohorts. As a result, housing construction may appear erroneously in line with household creation, ignoring that the employment rate is lower than it should be.

A recent Smart Prosperity Institute (SPI) report used demographic data to estimate that Ontario will need to build an additional 1.5 million new homes to meet the demand generated by new homes and to offset previously unsatisfied demand.

If you think that number is large, Canada Mortgage and Housing Corp. the need for an additional two million homes in Ontario over the next decade to meet the housing shortage.

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Surprisingly, SPI’s demographics-based detailed analysis is almost identical to the goal of 1.5 million homes built previously set by Ontario’s Housing Affordability Task Force. While the task force did not disclose details of its methods, the SPI report provides a detailed explanation of its assessment.

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The SPI breaks down the supply statistics into 1.03 million net homes (taking into account demolitions and conversions) needed by 2031 to accommodate population growth and another 471,000 homes to address the existing housing shortage. The Peel suburban area reported the largest number of housing needs at 277,000, surpassing the number needed for the city of Toronto.

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The SPI report used average 2016 age-adjusted headship rates for locations in Canada, excluding Ontario and British Columbia (the two provinces with extreme housing price increases), to determine the number of oppressed households, or existing housing shortages. Future demand for housing is based on government demographic projections.

The recent slump in home sales and the noticeable drop in prices suggest that prices can fluctuate independently of home construction. The recent increase in the cost of borrowing has made monthly mortgage payments unaffordable for those seeking new mortgage loans. This has led to a temporary decline in housing demand.

The Canadian Real Estate Association reported that the sales-to-offers ratio, an indicator of supply and demand, fell to 52 percent in June from a peak of 85 percent in January.

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Long-term house price trends depend more on the balance between demand and supply than on short-term fluctuations caused by changes in interest rates and other limited-impact interventions. Therefore, public planners must not lose sight of housing construction, because the housing deficit has already risen to millions.

Murtaza Haider is Professor of Real Estate Management and Director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.

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