Since it was proposed in 2022, the notion that Canada needs to build 5.8 million new homes by 2030 has been seen as the gold standard of housing targets, informing public policy, populating the headlines, and spurring discussions.
But what if that number was wrong?
A new report authored by Steve Pomeroy, Executive Advisor and Industry professor at the Canadian Housing Evidence Collaborative (CHEC), argues that the target is based on a “theoretical analysis,” and is an “unrealistic” number that must be rethought.
The figure was put forth by Canada Mortgage and Housing Corporation (CMHC) in a report that sought to determine just how much supply was needed to restore affordability by 2030.
It takes into account the number of homes that are likely to be built anyway based on recent rates of new construction (2.3 million units), and then uses modelling to determine how many additional homes would reduce the housing cost-to-income ratio to 30%, a level last seen in 2004 (3.5 million units).
As Pomeroy explained to STOREYS, 5.8 million homes isn’t actually the number of units Canada needs by 2030, but rather the number of units that would sufficiently reduce home prices back to CMHC’s benchmark level of affordability. But that’s not how it has been seen in the public, and political, eye.
“We’re all trying to figure out how can we address the housing affordability crisis, and to what extent can increasing supply help to bring prices down to an affordable level. CMHC were testing a concept to see if they could model that out as a theoretical exercise. What then happened was the results of that exercise — this 5.8 million homes number — were taken completely out of context by public officials and the media,” Pomeroy explained to STOREYS.
“Every time someone's talking about housing they say it as a statement of fact: ‘We need to build 5.8 million homes over the next seven years.’ But the reality is that CMHC didn't say we need to build 5.8 million homes over the next seven years. They said that if we want to achieve affordability, building 5.8 million homes over the next seven years would get us back to where we were in 2004. But that’s obviously something that’s not going to happen.”
Conflicting Reality
Central to CMHC’s affordability solution is a plan to flood the market with excess supply, thereby driving prices, and rents, down. But, as Pomeroy notes, there are several areas where “reality conflicts with CMHC’s aspiration.”
A key element of said plan is filtering, a process wherein higher income buyers purchase the new and often more expensive homes, leaving their older properties at a lower price for the next income bracket, and so on.
Filtering has shown to be successful in cities that have experienced depopulation or have high vacancy rates. But in a scenario where supply is constrained and demand is high, the vacated properties often experience significant price appreciation.
Similarly high demand alongside vacancy decontrols defeat the filtering process in the rental market too, as landlords are able to raise affordable rents to market level when tenants move.
For CMHC’s plan to lower prices through oversupply and filtering to be successful, Canada’s population growth must slow, Pomeroy said.
Another area of conflict is the behaviour of the housing market itself. There is “considerable friction” within the system, with labour constraints, high materials costs, and high interest rates weigh on homebuilding. Instead of surging, as would be required to meet the 2030 target, actual housing starts declined 7% in 2023 compared to 2022, and will likely trend lower in 2024.
As well, developers and builders are not inclined to flood the market with excess supply as it could potentially reduce their sales profits. Rather, they’re likely to do the opposite, holding off on new projects until there’s greater certainty that units will be quickly absorbed.
And without reaching a certain pre-sale threshold, developers can’t secure financing for new multi-unit developments anyway. Even CMHC itself imposes similar constraints in its loan insurance underwriting.
“The system kind of breaks down. Out of the commercial side of its mouth, CMHC is saying we need to massively increase supply in the market. And from the insurance side, it’s saying this is too risky, we’re not going to insure these loans to get construction started the first place,” Pomeroy says.
Policy, Please
Beyond questioning the basis of CMHC’s plan, Pomeroy argues that solely focusing on supply is “insufficient and misleading,” and that complementary policy action is required in order to manage demand.
In order to “level the playing field” between first-time buyers and existing homeowners, Pomeroy advocates for a federal property transfer tax on sellers.
Such a tax is already implemented on a provincial level, but targets the buyer. By taxing vendors, part of their excess purchasing power — one of the factors driving up home prices — would be erased. An even better option, he said, would be a combined provincial-federal tax on vendors, and the elimination of the existing tax on purchasers.
However, the idea was a “non-starter” when broached with federal leaders — it’s “politically unattractive for obvious reasons,” Pomeroy said.
More fruitful conversations have been had over his strategy to manage the loss of existing affordable rentals. Pomeroy recommends adding a new funding stream to the National Housing Strategy that would enable non-profits to acquire and preserve existing low-to-moderate rental properties, an approach that is faster and more cost effective than building new units.
“Certainly on the idea of acquisitions, I've had numerous meetings with both the Prime Minister's office and Minister Freeland’s office, and they are seriously reviewing that at the moment,” he said. “I would expect we'll see some kind of announcement in the budget around providing funding to nonprofits to acquire existing properties.”
On a provincial basis, Pomeroy suggests governments review vacancy decontrol policies in order to address rising rents. While supply plays catchup, a temporary limit on rent increases for vacant units would provide “critical relief” to renters who are forced to move. Newly constructed units should be excluded in order to avoid creating a supply disincentive.
Excess demand on the rental system could be further addressed with a more “carefully managed” process for admitting international students and temporary foreign workers. Commenting on the federal government’s cap on visas for the former group, Pomeroy said it would have a “modest effect” over the coming years, rather than an immediate impact.
Another of Pomeroy’s recommendations was addressed in recent weeks, as the federal government flooded the Canada Housing Benefit with an extra $99M.
How Many Homes Do We Need?
Pomeroy stopped short of providing an estimate of his own for the number of homes Canada will need to restore affordability by 2030. Instead, he's advocating for a “more realistic” estimate of supply.
The report states that an updated estimate should include a sufficient surplus of units beyond demographic and immigration projections so that mobility and choice are enabled. It should also take into account the suppression of new household formation caused by high prices and economic uncertainty, and include the construction of deeply affordable units.
And any recalibrated supply target should inform municipal and provincial planning, as well as federal initiatives like the Housing Accelerator Fund.
But Mike Moffatt, economist and Senior Director of Policy and Innovation at the Smart Prosperity Institute, told STOREYS that without an updated population forecast, and a plan to manage growth, creating an accurate supply estimate will be challenging.
The last Statistics Canada population projection was released in August 2022, and has already fallen short. The forecast predicts the population will be 42.8 million come 2030 in a medium-growth scenario, and 44.1 million under a high-growth scenario. As of October 2023, Canada's population estimate was 40.5 million people.
As Benjamin Tal, Managing Director and Deputy Chief Economist at CIBC Capital Markets, noted in a recent report of his own, CMHC’s supply gap estimate hinges on a base population of 38.9 million people. Assuming a 2% average annual population growth through 2030, the supply gap will be closer to 5 million units at the end of the decade, rather than CMHC's 3.5 million.
“If the government had said 10 years ago, ‘Oh, by the way, in the year 2023 we will grow by a million people,’ then municipalities and builders and developers could have planned for that,” Moffatt said.
“The private sector would have seen the market opportunity and we could have done something about it. So what matters more isn't necessarily the number of homes, but having a credible and detailed forecast. Having some kind of long term plan I think would really go a long way. And then we can be more as aggressive on population growth as we want, obviously, within reason.
“People can’t afford to be spending 45%, 55% of their income to live in a condo in Toronto. Something has got to give. Are we going to build more? Are we going to reduce population growth? Something has to happen. We can’t stay at this level [of affordability] forever.”
More Estimates To Come
In September 2023, CMHC published an update to its initial housing affordability report, but the supply gap estimate was unchanged from the 2022 projection. Aled ab Iorweth, Deputy Chief Economist at CMHC, told STOREYS another iteration of the report is due out in June.
Key to the latest update will be strong population growth, weak economic growth, and the impact of interest rates on housing supply, ab Iorweth said.
“It's possible that our projection of what will be built anyway has come down because of the uncertain macroeconomic conditions,” he said. "So, between those factors, my best guess at the moment is that the supply gap has gone up.”
Regarding the claim that the 5.8 million homes target was based on “false premise,” ab Iorweth said CMHC used the best data that was available at the time, and that alternate supply scenarios included in the initial report were intended to illustrate the “sensitivity” of the numbers.
“I think it's extremely difficult to meet the targets. Part of the purpose [of the targets] is to highlight the importance of supply, that we really need to get going on increasing supply. But we also have to be realistic about the time it takes to get stuff approved and developed. The timelines are really long. But I think part of the importance of the report is to stress how important it is for us to get moving on supply so that we can go back to some sense of affordability,” ab Iorweth said.
“We need all levels of government work more together. We need faster approval times. We need the removal of any tax burdens. We need to recognize how important private investment is, particularly in the rental sector. Really, we need to have more transparency, predictability, rapidity. The whole approval system needs to happen a lot faster to get more stuff built.”
