On the heels of a second consecutive quarter-point interest rate cut from the Bank of Canada, Governing Council warned that cuts alone aren’t going to be a saving grace for the country’s housing woes, pointing to a “structural” supply imbalance that long preceded the higher rate environment (and is likely to persist well after rates come down).
Senior Deputy Governor Carolyn Rogers expressed in a press conference on Wednesday morning that while “it’s absolutely the case” that housing is interest rate-sensitive, rate cuts won’t do much to remedy the supply-demand dilemma, which has been brought on by “record population growth in Canada against what was already a constrained supply.”
“We've had a long-standing housing imbalance in Canada,” Rogers said. “I'm from Western Canada, we've been feeling it for years, it's moved to other big cities in Canada in recent years. And during the pandemic, it moved even to smaller cities. So it was there before interest rates went into emergency low levels, it's still with us now that interest rates have gone up.”
On the supply side of things, Vice President and Chief Economist at Altus Group, Peter Norman, tells STOREYS that rate cuts — while certainly sending “important signals to the market” — will take time to make a material impact homebuilding.
For one, Norman warns (and as we’ve seen in the latest housing stats), a rate cut or two won’t translate into droves of buyers in the near-term, and buyers are, in very large part, the difference between a prospective housing project penciling out or not. Taking the GTA as an example: most developers need to see pre-sales reach about 70% before they can secure financing to actually get shovels in the ground.
There are other systemic factors to consider, too, which pose barriers to getting supply off of the ground at the pace markets need, and contribute to this reality of a housing imbalance. For instance, the sheer time it takes to get a development through the pipeline. In fact, Canada Mortgage and Housing Corporation’s latest Housing Supply Report, released this past March, shows that the average housing construction timeline across the country’s six largest CMAs clocked in at close to 19 months in 2023 — and that’s from foundation to occupancy, so it doesn’t include the (in many cases) years it take to get approvals in the first place.
“What I will also say, because I think that it's an important point, is that we have built ourselves into aspects of this structural problem with issues with our planning system dating back a couple of decades — or certainly a decade or more — in key markets like Vancouver, like Toronto,” Norman says. “We haven't planned for enough of the type of housing that people want, and we plan for too much of the type of housing that people have shown a certain need for in the short-term, because we have these imbalances, but aren't fundamentally what we need.”
As an example, he points to millennials who are “at the precipice of their life stage," wanting to move out of an apartment and into a starter home, but who aren't able to find a product at a price-point they can manage.
“Most demographics, right now, are pushing towards ground-oriented housing, yet massive amounts of our planning framework is around how to plan for and build and continue to densify urban centres. So that's a big part of the structural problem that we have right now,” he says. “That's also what's pushing up the price of [single-family] homes in particular. And that's what's causing, on the backside, this blackness in the condo sector that we're seeing.”
Circling back to interest rate cuts — the buzzwords of the moment — Norman says he sees plenty of “opportunity” for the BoC to cut once, and maybe even twice over the remainder of 2024. And while he's firmly of the belief that cuts will be helpful in terms of improving market sentiment, he underscores that they aren't likely to remedy some of the long-standing pain-points when it comes to how we approach homebuilding in Canada.
Rogers says the same. “We are going to lower interest rates if the economy continues to go in the direction that we expect. That’ll have some effect, that’ll help on housing, but it isn’t the magic solution,” she said. “It would be a mistake to pin all of our hopes on our housing imbalance on interest rates. Canadians need a more fulsome, more coordinated policy response than that.”
