Why I believe a more immediate demand-side lever is being overlooked.
“Is increasing home supply the only way to bring down home prices?”
This was the question that Ontario Real Estate Association CEO Tim Hudak and I were recently asked to debate for Post City magazine and their “Streets of Toronto Blog”. While Hudak argued for the supply solution, I shared the following about what I feel is a more immediate and important demand-side issue.
As Canadian home prices reach a crisis level, the debate about the cause and potential solution has become very myopic. Politicians, the real estate industry and some economists have argued that high home prices are simply the result of a lack of supply and the only solution is to simply build more.
But when we consider the key drivers of high home prices — strong demand from Canada’s booming population growth and a supply shortage of new housing completions from the private sector — any potential solution must begin with the policies that our federal and provincial governments have the most direct control over.
In the years before the Justin Trudeau-led Liberal government took over in Ottawa, Canada’s population was growing by roughly 350,000 people per year, the highest population growth rate in the G7 since 2000. During that same period Canada was completing roughly 170,000 new homes per year.
In 2018 and 2019, the years immediately preceding the current Covid-19 pandemic, Canada's population growth accelerated to over 500,000 people per year, the result of higher immigration targets and a surge in non-permanent residents. How did Canada’s new housing completions change in response to this surge in population?
Not at all.
This experience offers two important insights. While it’s very easy for Canada to accelerate its population from 350,000 to 500,000 people per year, it’s not as easy to quickly build the additional 70,000 homes per year that would be needed to meet this surge in demand for housing.
Supply issues go well beyond regulatory issues. While we don't often have much sympathy for the home building industry in an ever hotter market, the fact is that home building is a complex undertaking. Scaling up Canada's housing completions would have required a decade of planning between all levels of government and the private sector to address many issues including how to ensure that the industry has enough skilled tradespeople to meet such targets.
Recent research from the Bank of Montreal found that countries with the fastest growing populations also tend to see the most rapid growth in house prices as seen in New Zealand and Canada .
A lack of link up between immigration and housing planning is likely a key reason why.
A more prudent approach to address Canada’s dual needs for strong immigration and affordable housing is to determine the rate of population growth that would meet our economic needs while remaining sustainable from a housing perspective. As policy makers find solutions to increase the supply of new housing, Canada's population growth could be increased without putting undue pressure on home prices.
But our governments have taken the opposite approach — they’ve decided to rapidly increase Canada’s population growth and now they are scrambling to try to figure out how to build the additional homes we need, while all Canadians — including newcomers — grow increasingly dismayed as home prices skyrocket out of reach.
Increasing Canada’s supply of housing will always be a continual problem that will need to be managed — in acknowledgement of this, syncing up our demand side management, primarily in the form of population growth, is the most important and doable first step. As long as Canada’s population grows faster than our ability to build homes for all Canadians, we will continue to see untenable pressure on home prices.
John Pasalis is President of Realosophy Realty, a Toronto real estate brokerage which uses data analysis to advise residential real estate buyers, sellers and investors.
A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).