Home builders are tackling Canada’s housing supply shortage

Canada’s housing supply fell short of demand even before COVID struck, a situation the pandemic brought into sharp relief. It’s not that home builders have been sitting idle. Housing starts over the past 12 months were the strongest since the mid-1970s, and the number of homes under construction is at an all-time high. The problem is that it takes time for new construction to reach the move-in stage. The average timeline has more than doubled over the past two decades, from 9 months to 21 months.

The construction boom is beginning to deliver more move-in-ready supply. Housing completions should accelerate in the coming year—provided supply chain-disruptions in the construction industry don’t interfere too much with ongoing work. Yet the market impact will vary across the country. Smaller markets are seeing the bigger relative increase in housing starts, and will get more supply sooner. It will be a longer wait in some of Canada’s larger markets, where the pandemic construction boom has been more subdued and heavily concentrated in slower-to-build multi-unit dwellings. Big-city supply issues are likely to persist, especially as stronger immigration drives up housing demand in the coming years.

The pandemic got builders cracking like it’s 1977
The pandemic triggered a sharp drop in interest rates, a huge build-up in household savings and changing housing needs that sent an unprecedented wave of Canadians scurrying to buy a home. The stampede syphoned off the stock of existing homes for sale and depleted newly built home inventories, especially for sought-after single-family and other low-rise homes. These, and sky-rocketing prices, proved unambiguous signals for builders—and municipal permit-issuing authorities—to get cracking and expand Canada’s housing stock.

Their answer has been dramatic. In the past 12 months, builders across the country have poured the foundations (defining a housing start) for the highest number of housing units (260,500) than at any time since 1977. This represented a 26%, or 53,600-unit, increase relative to the 2015-2019 average pace (206,900 units).

 

 

 

There have never been so many units under construction in Canada
The pile of new projects put more strain on builders’ already record workload. There are now close to 320,000 housing units under construction in Canada. This is by far the highest number, and a 12% (or more than 30,000-unit) increase from the end of 2019. About three-quarters of the total are apartments (mostly condos but also rental).

 

 

 

 

 

So far, new homes ready for occupancy are rising much less dramatically
All that construction activity has yet to significantly boost the move-in-ready supply. It can take from six months to several years to complete a unit, depending on the type. Various pandemic-related disruptions and challenges no doubt lengthened the process. Still, completions are rising: builders have completed 215,000 new units in the past 12 months, up from an average of 193,000 units from 2015 to 2019. This continues to be short of the 220,000 average increase in the number of Canadian households in the four years preceding the pandemic.

 

 

 

 

 

The pace is poised to accelerate
We expect completions to rise materially in the coming year as builders put the finishing touches on units started both before and during the pandemic. The sheer number of apartments under construction (with typically longer production timelines) should also support high completion counts beyond next year. While many factors can alter delivery schedules, we think as many as 240,000 housing units could be completed in 2022 nationwide—the biggest push in a generation to address supply issues. Stronger levels like this will need to be repeated in years to come to make up for under-building in the past decade and meet growing demand arising from record projected immigration. Relative to population, completions have stayed below their long-term average throughout the 2010s.

 

 

 

 

 

Smaller markets to see a quicker boost in supply
Canadians’ love affair with smaller towns’ lifestyle and relative affordability during the pandemic has sparked a construction boom unequaled among larger markets (all proportions considered). Rural and small urban areas recorded the strongest growth in housing starts in the past 12 months relative to the 2015-2019 period, rising 51% and 33%, respectively. Medium-size urban areas weren’t far behind with an increase of 27%. Not only that, the types of housing built are predominantly (70%) single-detached and other ground-oriented homes, which have usually shorter construction timelines. This means the builder response in smaller markets is not only significant size-wise but its impact on supply will be quicker than in larger metropolitan areas where apartments accounted for 62% of starts in the past 12 months.

This isn’t to say big-city builders dragged their feet during the pandemic. They, too, poured many more foundations (housing starts climbed 23%). In fact, census metropolitan areas (CMAs) accounted for the bulk (38,000 units) of the overall increase in housing starts (57,000 units) from the 2015-2019 average. It’s just that the timeline toward completions will be longer for the most part.

 

 

 

 

The picture in major markets is mixed
Housing starts barely increased in the Toronto region in the past 12 months compared to the 2015-2019 average, rising just 1.4% or 500 units. The ramp-up in new construction was a little more vigorous in Edmonton (up 4.1%), Calgary (up 7.2%) and Vancouver (up 10.3%) but still well below the national average (26%). Relatively flat starts in the Toronto area in part reflect a significant drop in pre-construction condo sales in 2018 and 2019 following Ontario’s Fair Housing Plan in 2017. A recent spike in building-permit issuance suggests the pace could pick up. Failing that, the supply response will look underwhelming in the region—prolonging the significant challenges facing buyers and renters.

Builders are working hard to address supply issues in Montreal and Ottawa. Housing starts over the past 12 months were up 11,000 units (or 50%) from the 2015-2019 average in the Montreal area, and up 5,700 units (or 65%) in Ottawa-Gatineau. Purpose-built rental units accounted for more than 90% of the increase in Montreal.

 

 

 

 

Are the right kinds of unit being built?
The sheer number of homes slated to come to market is one thing. But will they be the right ones to meet demand across the country? Yes and no. The new units for the most part have already found takers. Builders and developers most often start construction on projects only after they have firm sales agreements in hand. The market’s answer is therefore yes. At the same time, it’s unlikely the new supply will fill the huge housing gap for Canadians of modest means. High and rising construction costs pose tremendous challenges for builders to produce more affordable options, leaving many Canadians struggling to get on the housing ladder.

The pandemic has also thrown into question several prior housing preferences. Extended time spent at home prompted many Canadians to seek larger living spaces, and loosened attachment to live in core urban areas. While it’s unclear how permanent these changes will be, there’s a potential that unit size, configuration and location of recently started high-rise projects may fall out of favour. Apartments (both condos and purpose-built rental) not only accounted for most (55%) of the housing starts over the past 12 months, but also showed the biggest increase (39%) from the 2015-2019 average.

 

 

 

 

Mix of new housing needs recalibrating
Slow supply responsiveness has been a central issue for Canada’s housing market for years. While we’re encouraged to see municipalities issuing more building permits and builders cranking up housing starts over the past 12 months, it still takes close to two years on average to build a home (ranging widely across housing types). This average construction length has more than doubled over the past two decades. The main reason is apartments (taking the longest to build) have come to represent a significantly larger share of homes built. Limited construction capacity has also been a factor in some parts of the country. And those timelines don’t even count the time (and resources) required to obtain the proper approvals and permits to get shovels in the ground.

Part of the solution to Canada’s housing market imbalance runs through the mix of new units being built: a recalibration toward project types that can deliver move-in-ready units more quickly to market—like low– or mid-rise housing—would boost supply responsiveness. Addressing the ‘missing middle’ (lack of medium-density housing) in some of Canada’s largest urban areas, for example, would be a significant step in that direction. This should be done in conjunction with a sharp focus on streamlining regulatory and project approval processes, and tackling skilled trade shortages and other constraints that limit production capacity.

 

 

 

 

 

 

 

 

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What’s driving housing starts?

Supply shortages are hitting single family starts, despite an overall rise in the number of homes being built and homebuilder sentiment improving for the first time in three months, two reports show.

Builder sentiment rose in September by one point, according to the National Association of Home Builders/Wells Fargo Housing Market Index, amid a drop in lumber prices and a rise in buyer demand.

Last month also saw a 17.4% year-on-year rise in private housing starts, as well as a month-over-month increase in permits, according to a separate report released this week by the US Census Bureau and Department of Housing and Urban Development (HUD) on new residential construction.

The increase in permits and starts is seen as a response to near record-low rates, the limited supply of existing homes for sale and the unrelenting demand for properties.

The upbeat news from the construction sector was, however, offset by the fact that starts on single-family homes fell 2.8% month-over-month during the same period.

First American deputy chief economist Odeta Kushi (pictured) told MPA that while the homebuilders’ sentiment and the overall housing starts increase “was good news”, she pointed out that multifamily housing starts had been the main driver.

She said: “The multifamily has really been responding to the people coming back to the city; the lower vacancy rates and the higher rents that we’ve been seeing.

“Builders are responding to that and to the demand for apartments, and we’re starting to see that creep up in the numbers. This was not at the expense of single family, necessarily, because the decline in single family starts really has a lot to do with supply shortages as opposed to any sort of weakening demand.”

She added that the homebuilders’ sentiment helped to confirm her view that they were responding to strong demand for homes, but that “they would like to build more single-family homes”.

She pointed out that the rate of single-family home projects which had been approved but were still waiting to commence had soared by 50% year over year.

“That’s clearly a sign of ongoing supply chain issues – builders are kind of trying to finish up projects rather than starting new ones,” she said.

The current projects she referred to include a record number of single-family homes under construction, which had increased to 702,000 units – the highest level since 2007.

She, however, expressed concern about material shortages and was less effusive about data showing that lumber prices had plummeted, from more than $1,600 per thousand board feet to the more recent price of about $400.

“Lower lumber prices are reflected in the stock market, but they have not yet made their way to builders. The hope is that they will, which should help to ease the cost,” she said, warning that there were still significant shortages in construction materials, particularly for windows and cabinets.

In addition, she alerted to the fact that more skilled laborers in the construction industry were needed. “Those were headwinds that existed even prior to COVID and made worse by the pandemic,” she said. “So I don’t anticipate they will disappear entirely.

“The bottom line is the housing market has been underbuilt for a decade and builders can’t close the gap between supply and demand overnight, but they are trying.”

Nonetheless, she said she expected the easing of supply shortages as the country entered the fall and winter months, which would give builders “a chance to catch up”.

Her comments echoed the views of Dr Robert Dietz from the National Association of Home Builders (NAHB), who last week said that supply chain problems could ease over the next year to year-and-a-half.

“I would generally agree – I think that we’re starting to see that in other parts of the economy as well,” she added.

Looking ahead, she said she expected to see a modest rise in mortgage rates over the medium term due to the improving economy.

She said: “The 30-year fixed rate mortgage is loosely benchmarked to the 10-year Treasury yield, and when times are good, you see that yields creep up and mortgage rates alongside it, likely by the end of the year.

“With that said from a historical perspective, we don’t anticipate that increase in mortgage rates to be substantial. It’ll be a pretty modest increase.”

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Mortgage delinquency rates ease in Q2 – Equifax

Government support and payment deferrals played major roles in improving Canadians’ financial health, Equifax said

Despite the end of payment deferral programs, Canadian mortgage delinquency rates declined from first-quarter highs in Q2, according to Equifax Canada.

The 90+ day mortgage delinquency rate fell by 32.6% annually in Q2, while the rate for non-mortgage products dropped by 28.6% during the same period. On average, the Equifax credit score for consumers grew by 12 points over the last two years.

“The consumer credit market continues to recover from the effects of the pandemic, with government support playing an important role in improving Canadians’ credit health,” said Rebecca Oakes, assistant vice president of advanced analytics at Equifax Canada.

However, with this support steadily winding down, a near-future spike in late payments is possible, Oakes said.

“We may see surprise insolvencies occur where consumers with no delinquency history on file and a decent credit score end up filing without warning,” Oakes said.

Another major area of concern is the growing volume of mortgage debt taken on by Canadians with lower credit scores, Oakes said. While this cohort accounts for just 10% of all new mortgages, their average loan amount has increased at the same rate as consumers with higher credit scores.

The risk is amplified by the 3.7% inflation rate in the 12 months ending August, the highest annual increase since May 2011.

“Prices for consumer goods have risen and if the inflation trend continues, there is potential for an earlier-than-planned interest rate increase to curb this,” Oakes said. “With many consumers now heavily leveraged and the potential for increases on variable rate mortgage and HELOCs, consumers may find themselves not in a position to pay back their debt obligations if interest rates rise.”

Source: Equifax Canada

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Canada retail sales bounce back

Retail sales in Canada rebounded after falling earlier in the summer months, a reassuring sign that consumers continue to spend.

The value of receipts rose 2.1% in August, according to preliminary results provided by Statistics Canada on Thursday in Ottawa. That more than offset a 0.6% decline in July. Retail sales are still below the record monthly total reached in March, but are well ahead of pre-pandemic levels.

August retail sales were at about CA$57 billion, according to Bloomberg calculations. That compares to an average monthly total of CA$55.2 billion between April and July for retailers, when sales stalled.

Some economists suggested the spending pause over the summer was due to reopenings that shifted consumer activity toward services businesses like restaurants and gyms.

Source: Bloomberg News

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