It would be accurate to call Canadians’ struggles with housing an outright crisis. Never before in Canada’s history has housing been as far out of reach for so many people as it is today. And while there are many contributing factors, how much is federal leadership, and their policies, to blame?

Elected in 2015 with a majority mandate, the Liberal Party has since survived two elections to form minority governments. During last summer’s election campaign, housing was front and centre and each party released comprehensive platforms intended to curb runaway home prices -- but it seemed previous failures to prioritize new supply and to curb rapid price appreciation were overlooked.

Since then, the affordability crisis has arguably worsened.

The crux of the matter is that housing demand has been vastly outpacing supply for years -- and will continue to do, only at an accelerated pace -- both in the new construction and resale markets. While it would stand to reason that supply-side solutions countervail excessive demand pressures, the government has instead stoked demand through monetary and settlement policies that failed to gain real traction.

Here's a look at some of the key issues that have contributed to today's affordability challenges.

Supply Gaps and Immigration Don’t Align

According to a report released by Scotiabank last year, Canada produces the fewest units of housing per 1,000 people among G7 nations because population growth is outstripping the ability to create housing. Moreover, the number of units produced has been in decline since 2016 -- it fell to 424 units per 1,000 in 2020 -- during which time, Scotiabank estimates, an additional 100,000 housing units would have been needed to match the population, and that would still fall below the G7 average.

In October 2020, Immigration, Refugees and Citizenship Canada (IRCC) announced that it would welcome 1.2M newcomers to Canada between 2021 and 2023: 401,000 last year, 411,000 this year, and 421,000 in 2023. Sixty percent of them are skilled workers, or who the IRCC deems the “economic class”.

Those lofty quotas would obviously aggravate the housing shortage, so it was confounding, then, when the IRCC scrapped those immigration targets last month in favour of a more aggressive plan that will see annual arrivals increase to 431,645 in 2022, 447,055 next year, and 451,000 in 2024.

Canada achieved its 2021 target of 401,000 -- the last time entries broke 400,000 was in 1913 -- which would bring the 2021-2024 total to nearly 2M.

To put that into perspective, the United States’ population is 330M and it welcomed only 500,000 immigrants last year. The result is that Canada’s neighbour to the south has so many gaps in its labour market that wages are growing, however, Canadian wages are sideways as a consequence of too much labour competition.

“It’s controversial to question the targets, but looking at it from the housing side of things, higher immigration equals more strain on the housing market,” housing analyst Steve Saretsky said, adding that the Liberals just voted against one of their own campaign promises to temporarily ban non-residents from buying Canadian real estate.

“They have policies where they vote down the foreign buyer ban and they ramp up immigration targets. We already have a housing shortage, so it’s an interesting time to ramp up immigration. They’re trying to grow the GDP by bringing in better talent into the labour force, but it’s going to add pressure to the housing market. It’s like trying to ride two horses with one ass.”

Saretsky believes the GDP boost would be nominal, but given how indebted Canada is -- especially after the latest COVID-19 lockdown -- the government figures, perhaps rightly, that more taxpayers are needed to pay down the deficit.

“The tradeoff is in the housing market and I don’t think they have any intentions to fix housing. Sure, they might want to build more supply: more supply is good; it means more people are working in the construction sector, and it’s good for the GDP as well as from an economic standpoint. And if we import more people to build housing our GDP will grow,” Saretsky said.

However, according to Dr. Murtaza Haider, Professor at Ryerson University’s Department of Real Estate Management, Canada badly needs an elevated number of immigrants. Moreover, he says it’s myopic to suggest the government cleave its immigration targets to make housing more affordable, because so much more rides on the utility of immigration.

“If we were interested in only one variable in the economy, and that’s housing affordability, then the answer is yes, natural growth or through immigration in the population, is a challenge. But the reality is we don’t have a one-variable economy, and the need for more immigrants is determined and dictated by the need for the economy to grow,” Dr. Haider said. “On the one hand, businesses are complaining there aren’t enough workers and on the other you have a very fast aging society -- and to get an idea, the number of children under the age of 15 were twice as many than seniors in 1986, and by 2016 we had more seniors than children in Canada. We have had a complete demographic shift because of this rapidly aging population.”

Apropos Canada’s overreliance on immigration compared to the United States, Dr. Haider says the latter’s domestic population growth rate is significantly higher than the former’s.

“Eighty to 90% of demographic growth in Canada is driven by immigration, which means that without new immigrants, the Canadian population would start to shrink. We don’t have sufficient growth.”

GTA Homes Surge Nearly 500% in 25 Years

And then there’s the run-up in price growth. A report from RE/MAX revealed that the average price of a Greater Toronto Area home surged by 453% between 1996 and 2021. While the pace of growth was regularly grabbing headlines as early as 2014, it has accelerated during the last seven years as the central bank plunged interest rates starting in January 2015.

With perhaps the exception of the B-20 mortgage stress test, which the government rolled out in conjunction with the Office of the Superintendent of Financial Institutions, policies designed to stymie runaway housing prices haven’t proven effective.

There was the First-Time Home Buyer Inventive in the 2019 federal budget that, through an equity stake, helps younger aspiring homeowners get into the market. More recently, there was the recent announcement that $10M has been earmarked to help 200 black families find housing in the GTA. The former puts more buyers in the market while the latter will have negligible impact.

As well, according to a report, too little funding has been allocated towards creating new housing supply.

Ron Butler, owner of Butler Mortgage, says the federal government has ignored the housing file, occasionally paying it lip service with specious policies.

“There is no level of expertise on this economic file,” he said. “There’s lots of expertise for the environment, climate change and inequity in society, and you can listen to Trudeau talk on those subjects for an hour, but he’s also the same guy who said he’s not involved in monetary policy.”

Butler recalls the late Jim Flaherty, Minister of Finance in former Prime Minister Stephen Harper’s Conservative government, raised hell a decade ago when the chartered banks’ mortgage wars began, warning them that they would run up housing prices, but no similar remonstration has occurred while the Liberals have been in power, and none is likely forthcoming.

In fact, it’s been crickets on a few fronts.

“Have you heard anything about affordability? They proposed they will get to something eventually but you will recall in the election [2019] prior to the last one, Trudeau would build a million homes, but did anything ever happen? His disinterest in these issues is so clear that it’s wild,” Butler said, adding that the government wants to increase the insured mortgage cap to $1.5M in major markets like Vancouver and Toronto.

READ: Could Steep New Mortgage Rules Be On the Way for Investors?

“Is there any legislation on the horizon? I think you can actually do that as an executive order, the Finance Minister can tell CMHC [Canada Mortgage and Housing Corporation] to do it, so where is it?”

Tax Policy Encourages Speculation

Rock bottom interest rates and surging home values are pushing Canadians to use home equity as down payments on additional properties, but they’re not relinquishing their primary residences -- in other words, even unsophisticated investors are speculating. But the argument can be made these people at least work and pay taxes in Canada, not to suggest that CMHC shouldn’t put an end to the practice. Should foreign speculators who use Canadian real estate to park their cash also be proscribed from continuing the practice?

“Some of it is quite innocent foreign money. There’s nothing dangerous about people bringing money over to live here and create families. And they work and pay taxes. They’re big contributors to our society, but what about some other foreign buyers whose only income is to own four houses? And maybe they make some rental income and continue collecting money from overseas,” Butler said.

“I see estimates that range between 800,000 and 1.1M empty homes in Canada. There’s a house on my street that has been empty for 9.5 years, and another house empty for 2.5 years. I was recently at a friend’s place in Oakville and noticed all the nearby townhouses were dark. Everyone says, ‘You’ve got no data,’ well, why don’t you ask anyone who has ever lived in a condominium in downtown Toronto? It can’t be that all of us seem to know of these empty homes. In my case, I know a number of them.”

International Speculators Feel Right at Home

Vancouver has among the highest income taxes in North America, but the continent’s lowest property taxes -- an ideal equation for non-residents who own property in the city. Throw in rock-bottom interest rates and Canadian real estate is an especially attractive draw.

Although somewhat dated, CMHC survey results released in late 2017 revealed that non-residents owned 4.8% of residential properties in Vancouver, although that number increased to 7.6% in Vancouver proper, and broken down by housing type, 10.6% of condominiums.

In the GTA, non-residents owned 3.4% of residences, but that number grew to 4.9% in the City of Toronto, and to 8% in Toronto proper condominiums.

“I think everybody is well aware foreign money has influence on the housing market here,” Saretsky said. “The problem is ultimately that ‘foreigners’ are actually Canadian citizens, or permanent residents. Their passports say Canadian. Often, they’re coming from overseas with Canadian passports but their businesses are overseas and they’re deploying capital here into the housing market. That’s definitely very prevalent.

“I would say it’s fairly safe to say we export housing.”

Rock Bottom Interest Rates Stoke Unaffordability

Although the argument can be made that the Bank of Canada had little choice but to plunge its overnight rate in the wake of the pandemic, the party went on a little too long, Butler says.

“There’s such a long list of mistakes -- how about keeping rates rock bottom and continuing it through quantitative easing, which keeps fixed rates artificially low? Why did they need to do it for two years? Everyone understood doing it for the first nine or 10 months, but why two years? We all observed prices start shooting up in 2020 and all of 2021,” Butler said.

“Where’s the justification for ultra-low interest rates when house prices are rising dramatically? There were multiple bids on the homes, which means there were a lot of people ready to buy. If you had 15 people lining up, that means there were people with money, which means the economy wasn’t on its knees. The people who are most vulnerable have been put in a position where they are going to be permanent renters because they will never be able to put a down payment.”

That situation doesn’t get any better for renters, who, because of low supply and a growing population—immigrants overwhelmingly rent during their first few years in Canada—are staring down sub-2% vacancy rates in Toronto and Vancouver. Moreover, although investor-owned condominiums have provided precious rental supply, they don’t have security of tenure like purpose-built rentals do. When a one-bedroom rental in Toronto is north of $2,000 a month, renters are most likely spending more than 30% of their income on shelter.

“They’re never going to own a house and they will be subjected to the vagaries of the rental market, which is impacted by ridiculous ownership prices,” Butler said. “If condo prices go up, your mortgage is higher, which means you will try to get higher rents."

Municipal Governments Sabotage New Construction

The Liberal government deserves to be cut some slack, Ben Myers, President of Bullpen Research & Consulting, says; or, at least, there’s enough blame to go around all three levels of government. Myers added that, on the municipal level, craven elected officials acquiesce to their NIMBY constituents’ demands too often, and it comes at the expense of sufficient new construction. He also questions the wisdom of the Green Belt because those protected lands could be used to help solve the housing crisis.

But Myers charges that municipal governments actually sabotage high-density projects to keep voters happy.

“It’s also expensive to service low-density land by building sewers and infrastructure. In areas with land available, there’s no servicing allocation, and municipalities have not built infrastructure to service those areas,” Myers said. “People are pushing back against density. The mayors of Aurora and Burlington don’t want high-rise towers; the mayor of Oakville is anti-growth, as well. A number of suburban mayors are pushing for low-density towers, and they do it because the economics don’t work. They will insist a higher-density development is pushed down to, say, four storeys. They push it down to a point where they know it won’t work economically so that it won’t get built.”

NIMBYs can be found on either side of the political spectrum. On the right, they think high-density developments will result in heavier street traffic, or that tall buildings will cast large shadows over their yards, and adversely affect their home equity, so they cynically claim renters aren’t invested in the community. Left-leaning NIMBYs, on the other hand, say politicians are in developers’ pockets and they clamour for affordable housing.

“But there’s no way we can build the number of housing units we need through non-profits and subsidies,” Myers said.

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