Housing Supply & Affordability: How Do We Fix It?

Housing prices continue to rise across Canada—including in major cities like Toronto, Vancouver and Montreal—faster and more significantly than any other country in the world. This trajectory started years ago, and as someone who’s been in this business for decades, the affordability impact is incredibly frustrating.

Young people who don’t have access to their parents’ funds have little hope of owning a home right now (I can vouch for this from personal experience). Meanwhile, some parents are sacrificing their retirements to try to give their children a chance at home ownership. That won’t change unless the real estate industry—the primary instrument of supply—works together with the government—the primary instrument of development density and approvals—to make an impact.

In short, we can do better.

I recently hosted a panel of experts and industry leaders to discuss the current state, how it’s affecting builders and consumers, and ideas on how the public and private sectors can work together to make a difference.

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  The Honourable Scott Brison, Vice Chair, Investment and Corporate Banking, BMO Capital Markets.

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  David Wilkes, President and CEO of the Building Industry and Land Development Association, or BILD.

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  Douglas Porter, Chief Economist, BMO Financial Group

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  Neil Chrystal, President and Chief Executive Officer, Polygon Homes Ltd.

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  Jim Spatz, Executive Chairman, Southwest Properties Ltd.

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  Michael Owen, Senior Partner, Mondev

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  Jim Ritchie, Chief Operating Officer, the Tridel Group of CompaniesFollowing is a summary of our conversation.

Brison offered suggestions on how the government can support the real estate industry in addressing the housing affordability crisis in his op-ed for the Globe and Mail titled “Government Action Can Help Spur More Home Building to Address Canada’s Housing Shortage.” And as Brison noted during his remarks, affordable housing is very much an economic issue. That’s in large part due to how it creates wealth and acts as a source of diversity. Noting the invaluable contributions immigrant communities have made to building housing in Canada, Brison stressed the importance of providing affordable housing to new Canadians.

“Anyone who wonders whether immigrants contribute significantly to the economic prosperity of Canada should look at the Halifax skyline sometime, because it wouldn't be much of a skyline if it weren't for people who moved to Canada to build their future,” Brison said.

Brison added that boosting housing supply is the priority, and that some of the populist rhetoric around immigration is the wrong path to economic prosperity. “The building industry has been a big part of the immigration success story,” he said. “New Canadians building companies, building housing for the rest of us. I don't think any of us view reducing the number of new Canadians coming to our country as being the way to address this.”

Porter explained that much of Canada’s growth over the past 15 years has been driven by labour force and population growth, not productivity. Lack of housing affordability is putting that in jeopardy.

"It's going to be tough to attract high-quality individuals if we don't have an affordable place for them to be housed,” he said. “We’ll be challenged to meet the modest growth rates we’ve seen over the last 10 years if we can't offer relatively affordable housing.”

Increasing housing supply is the obvious solution. The Ontario Housing Affordability Task Force has made increasing supply a priority, but Porter said those goals may not be aggressive enough, and that more ambitious goals could be difficult to achieve given the current labour market.

“When you look back over the last 30 or 40 years, the most housing starts we've ever had in a single year in Ontario was just over 100,000,” Porter said. “The most completions we ever had in a single year was in 1974 when we had 104,000 completions. What the task force is calling for is 150,000 every year for 10 years—that is incredibly challenging, that is a massive stretch goal. We're already facing very real labour shortages broadly in the economy and specifically within the construction sector. It's very tough to imagine that we're going to be able to ramp up supply in a very significant way without addressing the labour side of the equation as well.”

To that end, Brison made a salient point about how new Canadians could help alleviate the labour issue. He cited the Lebanese Building Community in Halifax, which helps Lebanese citizens enter the immigration system and develop their building trade skills, as a potential model for other regions.

“They’re able to build new housing for all Nova Scotia,” Brison said. “If we combine our relatively open immigration policy with our community college systems and a little bit of innovation in provincial governments, [we] could address this issue and bring in people who can help us solve this problem.”

Similarly, Tridel has a charitable foundation called BOLT—Building Opportunities for Life Today—which provides scholarships for postsecondary education and training for youth interested in pursuing careers in construction.

Porter also noted that the demand side has been just as big a factor on housing affordability as the supply side. After a couple of years of negative real interest rates, which the Bank of Canada implemented to help the economy get through the pandemic, we're entering what looks to be a period of aggressive monetary tightening, which Porter believes will change the demand dynamics.

“There are some economists out there saying the Bank of Canada will not raise rates that much because it will do a lot of damage to the housing market,” he said. “In the last couple years through the pandemic, the Bank of Canada basically turned away from what was going on in the housing market because they needed to keep interest rates incredibly stimulative to help support the rest of the economy. Now the shoe is absolutely on the other foot—we've got headline inflation that's likely to go above 7% in the next month or two. So, the bank basically will have to ignore what's going on the housing side as they crank interest rates to better tame and inflation in the months and possibly years ahead.”

Wilkes agreed with Porter’s assessment that housing affordability affects Canada’s economic competitiveness. And as a contributing member of the Ontario Housing Affordability Task Force, he had firsthand insight into the other issues that need to be addressed. At the forefront was a recognition for a change in cultural attitudes toward growth.

“With the growth that we expect through immigration and migration to urban areas from within our country, we're going to see the need for more housing,” Wilkes said. “So, we can't have a system that was built for the 1970s to accommodate the needs of the 2020s and beyond. We need to look at land differently both within our urban boundaries and outside of them. We need to ensure we recognize that the consequence of preventing growth is beyond housing and relates other factors around competitiveness and society.”

A cornerstone of affordability solution is creating more density. Achieving that, Wilkes said, will require new thinking around zoning, taxes and cultural attitudes.

“We have to take a hard look at the way we tax new housing and whether that's fair and equitable,” Wilkes said. “Right now, about 25% of the cost of a new home is the result of government fees and taxes. We're seeing some municipalities within the GTA looking at increasing that to 40% of the cost of new housing. That's not the way to affordability, and that is only going to, in our opinion, compound the issue that we're seeing through lack of supply.

“I worry that we will get distracted by some of the short-term demand-side issues and take our eye off the ball on the longer-term supply side ones,” Wilkes added. “Some of the things we could look at is rezoning within the city of Toronto. 70% of the land is designated for single-family [housing]. There's a huge opportunity for density. Also, making sure that people aren't opposing new development just because they can and there are vehicles within the system to do so. That opposition must be based on fact, not perception.”

I have the good fortune of working with builders across the country, and a few of them joined us to discuss the issues facing the regions they serve. Some common themes emerged, including the project approval process, the need for more density, and provincial and municipal government responsibilities.

To put the affordability issue into stark relief, in Toronto, a 700-square-foot condominium averages more than $1 million. That’s why Jim Ritchie of the Tridel Group believes local governments need to do more to make density a reality.

“Clearly this is not something that's going to happen without intervention from the province,” he said. “The municipalities on their own are not going to affect substantive change. We require greater density, and in areas where it's intuitive—with transit, with subways with light rail, in areas that have redundant commercial or industrial buildings—that could work. But we've got challenges with employment, land conversions, etc. We need to take a hard and strong look at density alone.”

For Neil Chrystal of Polygon Homes, getting projects approved in the Vancouver market is “a nightmare,” noting that it takes two to three years to gain approval. “The thing that gets lost in Greater Vancouver is the need for regional planning,” Chrystal said. “Often the province has ideas, but they have to navigate their way through 26 different municipalities. It's very challenging.”

Another challenge is the shift from a robust seller’s market as interest rates rise.

“We're seeing the market shift in front of our eyes,” Chrystal said. "It's happening very quickly as interest rates escalate and there's a lot of uncertainty in financial markets, which is giving buyers the time to pause and reflect if it's a good time to buy. So, what that means to us as builders is that we've got to be more creative in finding ways to make our homes a little bit more attractive. Because if you double interest rates, you're squeezing a lot of the first-time buyers out of the market.”

Jim Spatz of Southwest Properties explained the Halifax region has recently experienced a growth spurt. Traditionally a region with an aging population, over the last five years it’s become an area that has attracted young entrepreneurs, resulting in a booming tech sector. The approvals process, however, had not kept up with the new demand surge.

"We kept falling behind significantly in what was already a deficit in terms of total housing, so our deficit in total housing in Halifax is close to 20,000 housing units, which is roughly five years of our historical supply,” Spatz said. “So, we are in a large hole that is just getting [larger] because a lot of people now want to live here.”

Spatz pointed out that Nova Scotia’s new provincial government has made the approval process more accommodating. But now a new roadblock has hit the industry: inflation and interest rates.

“I'm sitting in my office looking at our latest downtown project next door, and we will be north of 15% above our budget,” Spatz said. "If we were starting today, it would be significantly higher. My sense is that governments could become hugely accommodating and we still would not get the supply that we need because the cost related to global factors has gone up so much. And interest rates have gone up significantly, so my sense is that if something is going to affect increased supply today, it’s trying to mitigate those kinds of issues. If this country wants to create more housing, they should do something bold that actually takes the cost down—HST, all the municipal fees, those sorts of things. Otherwise, I think you're pushing policy and accommodative planning into a world that has changed too much to permit housing to catch up.”

Michael Owen of Mondev said that while Montreal has remained affordable relative to other large metropolitan areas, he fears that's coming to an end.

“Density has become a fearful thing to discuss,” Owen said. “Whether it's because of the politicization of the approval process, or whether it's local governments that are afraid they're going to get voted out, I don't know. But density is going in the wrong direction in Montreal.”

While Owen agrees that budgets have “gone completely haywire,” he believes density is the solution there as well. “Let's face it: once you've started a project, if you could add five floors, there's economies of scale that would be very beneficial,” Owen said. “You don't need to bring plumbers and drywall guys and carpenters back onto a new project. You could take the project you're working on and just make it a little bit denser.”

Owen said first-time home buyers are the big victims in the current affordability crisis. Buying and selling a first home is what enables individuals to trade up, but that’s only true if you’re able to purchase a first home to begin with. To that end, Owen proposed a novel solution to attract young home buyers.

“I think age-based amortization is something that would be very interesting to young Canadians,” he said. “If you're 35 and under, you get your [35-year mortgage]. It's going to reduce the payments; it's going to make it more affordable despite increased interest rates and despite increased costs. And you could take it down from there. If you're between 35 and 45 you get a little bit less. Once you're over 50, maybe you're back to the normal 25 years. I think we need to do everything we can to encourage young people into the market, and I don't think we can wait for other measures. We have to do something now.”

I certainly agree with the assessment that housing affordability is a challenge that threatens Canada’s economic competitiveness. But as BMO’s Scott Brison noted, I also believe it represents an opportunity for a national growth strategy. But it will require cooperation from all levels of government, the private sector, and Canadian citizens.

"To really move the needle, we need more than just federal, provincial and municipal tax revenue to build the kind of housing Canadians need,” Brison said. “There should be every effort made to partner with institutional investors and pension funds to enable the investment in housing and leverage finite government resources, which, as we get into more of fiscal restraint in the coming years, will be important. But I think we've got a responsibility as citizens to do our best to bring forward ideas and action to build the housing across Canada and large communities and smaller ones that Canadians need and can afford.”