FINANCIAL GRIDLOCK … starting to move?
Did you see the latest Fall Housing Supply Report from the Canadian Mortgage and Housing Corporation (CMHC), https://assets.cmhc-schl.gc.ca/sites/cmhc/professional/housing-markets-data-and-research/market-reports/housing-supply-report/2024/housing-supply-report-2024-fall-en.pdf. This is a housing supply report. It is largely focused on housing starts (aka new homes being built) for the first half of 2024, with less detailed notes about “completions.”
Housing starts rose about 4% in major cities year-over-year, but this was nowhere near sufficient for the population growth. Housing starts in Edmonton have grown 67%, compared to the same 6 months in 2023. Calgary saw an increase in housing starts of approximately 38%, when compared to the first 2 quarters of 2023; Calgary builders have been prioritizing rental unit construction. Also, the downtown conversions from office-to-residential are mixed in with all of these statistics.
But tucked away quietly in the research is a realization. “Private sector funding accounts for 96% of Canada’s housing supply.” https://www.cmhc-schl.gc.ca/blog/2024/explore-housing-trends-in-cmhc-fall-2024-housing-supply-report. Let that fact really sink in.
That’s astonishing!
So that means, for all the headlines and fanfare for CMHC, they are only financing 4% of the new supply, even at today’s participation!
And that also means that when a government policy affects capital investment in Canada, it affects the housing supply. Many of us in the industry know builders, developers and investors who are all pursuing projects outside of Canada these days. Both the math and the overall government taxes/policies (including landlord/tenant rights & responsibilities) are literally driving qualified people and investors to look anywhere-but-Canada.
The Canadian Chamber of Commerce was realizing this trend months ago, and wrote an interesting article, https://chamber.ca/policy-matters-lessons-in-housing-from-the-united-states/. I personally would never say that the USA has all of the answers, but they are currently doing some things much better than we are in Canada.
In our tunnel-visioned approach to controlling inflation, Canada has created a type of financial gridlock for new home supply. High interest rates have prevented homeowners and small investors from purchasing their first or next home. That keeps some people renting (while others are moving into the country), during a housing shortage, with significant rental increases – all of which makes it more difficult to save a down payment. In addition, ultra conservative banking policies have taken a low-risk to no-risk approach and continue to apply the stress test to those strategic borrowers who finally have their down payments saved. On the other side of new home financing, the current funding models for developers in Canada require a percentage of homes to be pre-sold, before any bank will assist with financing. And when financing does get approved, a developer’s business plan is then further impacted by the same high interest rates that their customers are facing.
We have created a situation where one car can’t move, until another vehicle moves, until another ….
However, there was a notable shift this week that has the potential to affect real estate investors and/or consumers with more than 20% down payment, https://www.canadianmortgagetrends.com/2024/09/osfi-to-end-stress-test-requirement-for-uninsured-mortgage-switches/. And earlier in September we saw our third interest rate cut in Canada in 2024. Suggestions are that another rate cut is coming later this month. We’re not seeing any miracle cures out there, but the lending policies appear to be easing, https://thoughtleadership.rbc.com/falling-inflation-and-rising-unemployment-usher-in-easing-cycles-in-canada-and-abroad/.
Did you notice? We’re specifically dodging a discussion about policies, from various levels of government, that have a tremendous impact on builders, developers and real estate investors. Another day … or over a coffee?
We should note that CMHC has been attempting to improve financing options for multi-family builders, but they seem to be limited by staffing challenges –just like every other aspect of the home building community. And so far, it’s only 4% of the solution. WOW!
Just like traffic gridlock is caused by an initial problem, then multiplied by hundreds if not thousands of cars, the supply of new homes for all Canadians is not an easy or fast solution. But we’re starting to see signs of a little movement ahead. Plus, some incredible entrepreneurs are clearly out there, finding solutions, and getting homes built, especially in Alberta!
Next up, permitting gridlock???
