As of late, governments at all levels have woken up, and have been taking action on housing supply… Kind of.
Rental programs, subsidies, foreign buyer bans, nightly rental bans, and the like are being announced — regularly — across the country, but little supply appears to be emerging. Meanwhile, tens of thousands of units that were ready to go to market are being withheld, and no government programs are being announced to help make them go.
Let’s start with this last point. For this we will go to our data on project launches, and the amount of new supply being made available to the market.
In January, zero projects launched nationally, compared to four last year in what was a down market. Move into February, and we facilitated the launch of just five projects vs. 10 last year. Not a single tower launched in the GTA in the same timeframe, and only one launched in Vancouver’s Lower Mainland. Dig deeper into unit-level data and we see that by the end of last February, developers had launched more than double the new-supply units nationally as they have in 2024.
While governments boast about all the housing coming, the data shows the exact opposite is happening. The message is clear from developers: they won’t take the risk of launching until the math works — and clearly, the math is getting worse.
READ: Expert: New Condos Are The Housing Type Canada Needs Right Now
Some news articles suggest sales and absorptions are to blame for the supply problem, but again, our data suggests this is not really true. Yes, sales are harder to come by than they were at the peak; yes, there are developers getting crucified for their mistakes in the sales game these days; and yes, demand is clearly targeted (like it always is) at defined price ranges — but looking at market data, we find that supply is the laggard in the market moreso than demand.
In fact, absorptions remain steady, as evidenced by Canada’s first major urban tower launch of the year hitting its pre-sales requirement in its first weekend! (That’s Juno by Streetside Developments.)
So, if demand is not really the issue, why are developers not launching?
Last month we described an enormous backlog of projects ready to go this year, so the issue is not a lack of developments. We explained that things were slow in January, but were looking good on account of all the projects readying themselves. But then they didn’t come. Why?
READ: Presale Update: Forward Motion Despite January’s Slow Sales Start
The first bit of evidence is the cluster of projects lumped around the Bank of Canada’s interest rate announcement dates. With each announcement of held rates, these launches bounce to the next date — seemingly holding until they get the rate they’re waiting for.
For more detail, we talked to developers and sales firms. Over the last couple weeks, our team of Advisors and I spoke with leaders of many of Canada’s top new home development companies, and heard a disappointing-but-typical tale to make sense of all these delays: the math just doesn’t work.
There are a few reasons for this, and I’ll do my best to outline them here:
New government programs villainize condos and focus on rentals
This impacts housing in a few ways. It means that although there are tens of thousands of condo units ready to come to market (and provide much-needed owner-occupied and rental housing), the government has decided to do nothing to help ready-to-go condos. Instead, they’re focused on funding institutional rentals only. This has a few effects: many sites continue to sit as condo, waiting for some outside factor to help them work again (ie. rate cuts). Others delay and try to rework these sites with a purpose-built rental approach, hoping to qualify for new government backed programs — which they rarely do. Even when this approach does work, the entire development process needs to be run through again. The net result is, what could have launched imminently gets delayed for months — even years — and the small number of new rentals created is far overshadowed by the number of units that are held back.
Construction costs are not coming down… and they’re a result of a number of items that are being maxed:
A) Labour: Labour costs are rising as there are not enough skilled workers to meet building needs. Programs incentivising trade schools to bring more trades in are counterproductive, as they send the small number of existing trades back to school and off the job sites, making the pool smaller. In addition, incentivizing government housing and infrastructure projects — which everyone knows are the highest paying projects — is pushing all the trades to those few opportunities, which means producing less for the same money, and hurting the market sites where volume could exist.
B) Environmental requirements going up: I’m all for doing things to help the environment, but we’ve gone crazy with this… Overbuilt design requirements and excessive insulation practices (that then require expensive systems to manage airflow) are just a couple high-ticket items, and all of these require specialized (and pricy) professionals to install and sign-off. This has dramatically increased the cost to build. (Not to mention, it’s all with questionable environmental impact anyway, but I’ll save that argument for another article.)
C) Safety requirements going up: This one is fascinating, and is never discussed. Whether it’s out of a legitimate desire to keep workers safer, a culture that spins around fear, overzealous bureaucracy, and/or risk of litigation, safety standards and insurance are getting increasingly severe — and increasingly expensive. A recent example on my radar is the cost to change a flat tire on a forklift. It was obscene: over ten thousand dollars, once all the safety protocols were factored in.
Add up the pricing of safety measures across a construction site, and the total costs are enormous. This undeniably increases the cost to build, which is passed on to the final purchase price.
D) Inflation on materials: This requires no explanation. Inflation is increasing the cost of all materials used to build — and the cost to transport them, too.
Debt is too expensive — and governments are taking equity as their own.
Interest carry is one of the largest line items in a pro forma for a real estate development. With the average 150+ unit urban project now costing $100M and higher, it’s simple math to see the impact of 25 basis point increases or decreases to land and construction loans. The area not often discussed is that many of those loan sizes are increasing by requirement, to make up for lost equity in land.
To unpack that statement, we need to consider what I mentioned above — governments don’t like supporting profits, so if they give density and other things to make a development viable, they claw back the value created with all manners of fees and charges. Seems fair, but the challenge is that the land equity is what developers use to leverage the site to build. More density means more cost, and more risk, which would be hard for anyone to swallow if it also came with negative value creation.
Banks need something to loan against, and if the government is taking more value from the land, then developers have to come up with more equity themselves. On sites the size of what’s mentioned, that new equity requirement can be larger than what’s available from the average developer, so it often needs to be loaned — increasing the size of the debt on the site, and ultimately making many projects not work at all. Or worse: contributing to a rising number of receiverships.
The earlier-mentioned media on rental subsidies gets the mainstream headlines, but quieter stories — discussing increases to development cost charges, and government fees exacerbating this issue — are still to be found across the country.
So, if government-backed rental sites are a long way from creating meaningful (if any) supply, and with governments continuing to ignore condo projects that are primed (and would be ready, if they had a little support), and with construction costs remaining high, and with developers requiring more debt to make projects work, the only near-term scenario that gets housing going, from where I stand, is for rates to come down. Hence the title of this article. My belief is that for the sake of housing supply, and the health of the housing industry, the sooner rates come down, the better.
“Rate cuts will not only assist in lowering mortgage costs and enabling developers to provide supply at price points in-line with existing demand, but they are also necessary to facilitate development being viable at all, by lowering the incredible financing burden to those risking their capital.”
The data shows it is completely plausible — and possible — to serve tens of thousands of new housing units into the market in the coming months, just by lowering rates to the point that these existing and approved developments work. I can see these projects lined up in our system, ready to go, if only politicians would enable the flood gates to open.
That said, I suppose the question that remains is whether inflation is truly hurting the Canadian people more than the lack of housing supply. In this writer’s opinion, the answer to solve the latter could not be more clear.
This article is authored by Ben Smith, President of AVESDO: a Canadian software company harnessing the power of data to help real estate professionals make better, faster, and more informed sales decisions.
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This article was produced in partnership with STOREYS Custom Studio.
