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.
Subject matter experts:
The Honourable Scott Brison, Vice Chair, Investment and Corporate Banking, BMO Capital Markets.
David Wilkes, President and CEO of the Building Industry and Land Development Association, or BILD.
Douglas Porter, Chief Economist, BMO Financial Group
Builder panel:
Neil Chrystal, President and Chief Executive Officer, Polygon Homes Ltd.
Jim Spatz, Executive Chairman, Southwest Properties Ltd.
Michael Owen, Senior Partner, Mondev
Jim Ritchie, Chief Operating Officer, the Tridel Group of Companies
Following is a summary of our conversation.
Affordable housing = economic growth
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.”
A cultural shift
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.”
Builder concerns
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.
Toronto
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.”
Vancouver
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.”
Halifax
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.”
Montreal
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.”
Transforming crisis into opportunity
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.”
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Mike Beg: Hello, everyone, and thank you for joining us for our discussion on housing supply and affordability. I'm Mike Beg and I lead Real Estate Finance for BMO's Canadian Commercial Bank with offices across Canada. As we all know, housing prices continue to rise across Canada faster and more significantly than any other country in the world. This trajectory started long ago, and as someone who's been in this business for decades, I too have children and family who have been priced out of home and even rental apartment markets. It's incredibly frustrating to us all.
Also frustrating is that no meaningful or targeted measures have been taken as this unfolded that would sustainably stabilize supply and affordability. For so long, we just seem to be kicking the can down the road on this issue. This won't change unless, we, as an industry and the primary instrument of supply, and the government, as the primary instrument of development density and approval policy processes, work together to better manage housing supply and affordability. In short, we can do better.
The vast majority of my builder clients and colleagues care about affordability and stable supply because the lack of it in the face of record demographic demand trends has fostered housing bubble risk and volatility. The industry profitability is not higher or lower but just more stable and sustainable with better supply, so industry and consumer interests are aligned on supply and affordability. Today, I'm joined by experts as well as leaders within the industry to talk about 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.
We'll start with our panel of subject matter experts. The Honorable Scott Brison is a Vice-Chair with BMO Capital Markets. He's a former member of the Canadian House of Commons and former president of the Treasury Board of Canada. Scott wrote a recent op-ed for the Globe and Mail on this topic, entitled Government Action Can Help Spur More Building to Address Canada's Housing Shortage, which is on our website, bmo.com/realestate. It's a great read and I highly recommend it.
David Wilkes is the president and CEO of the Building Industry and Land Development Association, or BILD, B-I-L-D, on whose board I sit. BILD's mission is to enhance the health, vitality, and reputation of the home building, residential and non-residential land development, and professional renovation industries. Dave was a member of the February 2022 Ontario Affordable Housing Task Force.
Last but certainly not least, Doug Porter is BMO's chief economist. In addition to their global and North American economic analysis, Doug and his team regularly produce articles on the housing industry that can also be found on bmo.com and our website, bmo.com/realestate. For the first panel, I'm going to go to Scott and we'll start with you. Your Globe article calls on the government to align at all three levels to spur more housing supply. Why has this not happened and what must change in your view?
Hon. Scott Brison: First of all, governments tend to work in silos even within government, so to try to get coordinated action and leadership across all levels of government is difficult on any issue. On the housing one, though, there has been some real encouragement from provincial governments in recent months, governments of different stripes. I think it's notable that a conservative government in Ontario, a Liberal government in Nova Scotia at the time, and a New Democrat government in British Columbia, commissioned reports which came to some similar conclusions around the importance of generating supply and reducing barriers to supply for the Canadian housing market.
Beyond that, I think actually, within the federal budget, the Housing Accelerator program represents an opportunity to build on that policy momentum if you will, and to incent municipalities to implement pro densification policies referred to as [unintelligible 00:04:43] policies by some, and to get on with the important work more housing for Canadians.
I want to start from just a different perspective before Doug and Dave give very good policy advice and assessment of the situation. A couple of things, one is I think that this is an important issue economically, obviously, and socially, but also I think it's important to remind ourselves of what is at stake in some ways with the housing crisis as it is today. I think it threatens one of the greatest economic and social strengths of Canada, and that is immigration.
Immigration has been both a source of economic opportunity and entrepreneurialism and ambition for our country, creating wealth and prosperity for all of us, and also a source of diversity and multiculturalism that has built a better society for all Canadians, and new Canadians bring with them, of course, that incredible entrepreneurial strength and drive and ambition, but they also bring a need for housing.
Now, behind me, today is part of the Halifax skyline. 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, chose Canada, chose Halifax, chose Nova Scotia to build their future. The building industry, in fact, has been a big part of the immigration success story, new Canadians building companies, new Canadians building housing for the rest of us, and that is the opportunity part of today's discussion beyond just the crisis.
I think it's important to remind ourselves the importance of this discussion just from the perspective of the social license from Canadians for immigration was not overnight and it was hard-fought in some ways. It wasn't that long ago that people used to make the specious argument that why do we want new people coming to Canada when they'll take our jobs? It's easy to see how in some circles people might substitute houses or housing for jobs in today's vernacular, but they would be wrong as well because the fact is that while the supply, rather, demand is a significant part of this issue, the part we're going to focus on today is on the supply side because that's something we can do something about.
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. There is organic growth, there's new Canadians who want more housing. The opposite of crisis being an opportunity, this is a tremendous opportunity. Housing can be a national growth strategy for Canada. That requires a level of mutual understanding and collaboration across governments, federal, provincial, and municipal, and with the private sector.
One point, public money, tax dollars cannot fix this. It can be part, they can be and they have an important role for part of the solution, particularly in non-market housing, but when you move beyond that to really move the needle, we need more than just federal, provincial, and municipal tax revenue to build the kind of housing which Canadians need.
That is why one point I would make right off the top in terms of tax dollars being invested in housing is that there should be every effort made to partner with institutional investors and pension funds, not just Canadian pension funds but other pension funds, to enable the investment in housing by these pension funds and to leverage finite government resources, which as we get into a, more of a fiscal restraint in the coming years will be important.
Beyond that and the discussion today is going to give us an opportunity here, and particularly in the second panel from some of the leaders of the Canadian housing sector, on concrete ideas that municipal governments can implement to speed up approval processes, everything from shot clock-type deadline approvals, to transferable building permits or more transferable building permits, granular ideas, and again, the government has said they intend to take specific ideas and provide them to municipal governments and incent those governments with the Housing Accelerator Fund to implement them.
On the other hand, the government could also choose in the future to not invest or partner with municipalities who choose not to embrace densification, but I think we have a real opportunity today to kick some of this discussion off and I'm glad that we are saying what we're focusing on action today and what we need to do because I think that that's exactly the approach that reflects not just the priority from an economic and business perspective, but broadly for Canada. I think this is important and if we don't get this right, I fear that the populist environment today in politics, this will become another source of polarization in Canada, in division.
I think we've got a real opportunity today to talk about some of the ideas to grow the housing supply but I think we've got a responsibility as well as citizens to do our best to bring forward ideas and action to move the needle on this and to build the housing across Canada and large communities and smaller ones that Canadians need and can afford. Thank you very much.
Mike: Thank you very much, Scott, and now over to you, Dave. Dave, you were a contributing member of the Ontario Housing Task Force. What led to that task force and can you highlight its most critical messages?
Dave Wilkes: Good afternoon, everybody, and, Mike, before delving into what the task force did and the reasons behind it, I'd just like to start with a thank you. I appreciate the opportunity to join this august panel of my colleagues, Scott and Doug, and I appreciate, Mike, your reaching out to myself on behalf of our organization, BILD, to participate in this panel, so thank you very much to the bank.
The panel was really put forward for a couple of reasons. We were given an extremely short period of time to do our work, two months, and it was really to coalesce around the issues that Scott had mentioned, what were the challenges that were leading to the housing affordability crisis? What were the solutions, don't reinvent the wheel and come with a practical set of recommendations that could be looked at and implemented by governments, regardless of the strike, in order to solve the issue, and before getting into what the recommendations were, and there were 55 of them in the task force report, I will agree with Scott on a couple of things.
This is not just about housing affordability, although it is the centerpiece of the current discussion, it also affects our competitiveness as an economy, and it also affects who we are and what we define ourselves as a society. I think this is a very critical issue and I certainly would agree with my colleague Scott on it. There was five themes that came across in the task force report. Mike, if you allow me I'll just quote from the letter that our Chair, Jake Lawrence said to the Minister when submitting the report.
The five themes; more housing density is required, end municipal rules that block or delay new housing, depoliticize the housing process, and that's a key one, and it's a very difficult one for governments because after all, governments are instruments of the voters and in some cases, governments have to look beyond who is currently in communities, to who is coming to communities and make decisions that potentially might not be in alignment with groups that are living in the areas that they're representing, but those that are coming to the areas but that has to be depoliticized.
Two other recommendations, prevent the use of the housing appeal process and the delays that it causes, and a carrot and stick approach, provide financial support to municipalities to build more housing. Those were the themes that we coalesced around as a group of task force members. We've been very pleased or I've been pleased, not speaking on behalf of the task force, but to see the way that the report was received very strongly. There is a consensus, in my opinion, that supply is the solution to the issues we face around affordability and competitiveness in our society.
We've seen that from not only the Bank of Montreal but other players within the financial institutions. We've seen that from the Bank of Canada, we've seen that from the Canadian Mortgage and Housing Corporations, and most importantly, as Scott said, we've also seen it from our federal and provincial governments where there's been a number of instruments put forward to address the issue.
The last great frontier, in my opinion, is municipal governments. That's really where if I can coin an old phrase, the rubber hits the road, and that's really where the change needs to happen. I believe the task force report provides a roadmap for those changes and I would encourage us all, when we're speaking to governments in order to push them on that, to ask which ones they can implement and which ones they can't. Certainly, now back to my day job as the CEO of BILD, that's what we'll be doing throughout and recognizing. I sit here in Ontario, so for the Ontario provincial election and the upcoming municipal ones.
My closing remarks here related to what the task force did and what its purpose was is really recognize that we need a change in culture. We need a change in our attitudes towards growth. The task force called for 1.5 million homes to be built over the next several decades in order to facilitate that growth. That recognizes that we currently have a supply shortage within Ontario, and particularly within the GTA, and 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.
We can't have a system that is 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 that we recognize that the consequence of preventing growth is beyond housing and relate to those other factors that I mentioned around competitiveness in society, and most importantly, and I think this is a key one, we have to take a hard look at the way we tax new housing and whether that's fair and equitable.
Right now about 25% of a 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 issue that we're seeing through lack of supply.
Mike, the task force was called together to bring focus to the issue, the task force was called together to provide a set of recommendations that could be considered by government, and they're not an all or nothing, they are a series of recommendations that can and should be seriously considered to deal with what we believed was a very much of a generational issue. Speaking on behalf of the organization I work for, the Building Industry and Land Development Association, we believe it is a critical one and we need to stop worrying about if and start focusing on how, and I do believe that's what the task force report provides. Thank you.
Mike: Thank you very much, Dave, and now over to you, Doug. As an economist, what are the best policy options for improving housing affordability for owners and renters and maybe you can touch on the budget? I'll add one other comment, Doug because I think it applies to you. I was talking with another guest panelist who couldn't make this event, Jay Westman in Calgary, and he said that he felt from an economic point of view, it was about trying to loosen the constraints on supply enough to match a healthy inventory so it's not always a seller's market but more of a buyer's market. We've never seen bigger sellers' markets than we've seen right now, so maybe I'll throw it over to you to touch on those kinds of topics.
Douglas Porter: Sure thing, Mike, and thank you very much. Thank you for this opportunity. Good afternoon or good morning, everyone, and thanks for joining the call. I must say I'm not sure I can offer a really compelling answer on the economic side to address the supply issue in under 10 minutes. There are so many different angles to this, but I will make a couple of points on the economic side. First of all, I do want to just build on some of the very good points that Scott and Dave made just on the competitiveness side. This truly is a crucial economic issue. It is a threat to our competitiveness as long as we have unaffordable housing. When you think about it, what we've depended on for growth in this economy, it's been largely labour force growth, it has not been productivity. Unfortunately, we have a very dismal record on the productivity front in the last 15 years, it's grown by about 0.7% per year. In the last five years, it's actually been even slower than that, so we've overwhelmingly relied on labour force and population growth to drive economic growth.
Frankly, it's going to be tough to attract high-quality individuals if we don't have an affordable place for them to be housed, that alongside with a relatively high tax environment as well. We'll be challenged to meet the kind of growth rates that we've seen-- the modest growth rates we've seen over the last 10 years if we can't offer relatively affordable housing.
In terms of the supply outlook, and from an economic standpoint, one point I would like to make is, some of the supply goals that we've seen set some of the things that Dave spoke about and what were in the federal budget, all I will say is they are an incredibly challenging stretch goal. 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, it would be just over 100,000. The most completions we ever had in a single year was in 1974, 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.
Similarly, the federal budget called for a near doubling in housing supply. I guess what I would suggest is, 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 really ramp up supply in a very significant way without addressing the labour side of the equation as well. Of course, even as I speak, we're seeing all kinds of labour unrest within the industry, just even within the last couple of days. To me, that really suggests, again, just how tight the job market is in the sector.
I will make just a quick side foray since Mike asked about the budget. I actually found were it not for the war in Ukraine, I think housing would have been the dominant feature of this year's federal budget. It still, of course, was a very important part. I thought there were some fairly worthy elements to the budget. Certainly, two of the more interesting aspects were the First-Time Homebuyer Savings Plan. On the other side, of course, there's this big push on the supply side. Both relatively interesting I think, potentially important developments, but frankly, over the next year or two, they're barely going to move the needle on the housing situation.
The second point I did want to make, and this is one area where I think the needle is going to be moved in a very big way, is on the interest rate front. I'm not going to launch into a huge debate on this topic because suffice it to say, I've long been of the view that I do believe the demand side is every big of a part of the story as the supply side. What's really fired the demand side is the fact that we've had negative real interest rates for the last couple of years to help the economy get through the pandemic.
Well, even as we speak, of course, we're seeing that change before our eyes in the bond market, real interest rates have turned positive. We're in the very early days of what looks to be a very aggressive tightening program by both the Bank of Canada and the Federal Reserve. Our view is that the Bank of Canada will lift rates by another 175 basis points on top of what they've already done.
That would take the overnight interest rate to 2.75% we believe, by early next year. That's a full percentage point higher than we were in the past cycle. Frankly, I still think there are some upside risks to that view. By the way, we see a similar program by the Federal Reserve as well. I do believe that this renewed interest rate landscape is going to change the dynamics rather quickly in the housing market. We're already seeing some of that.
Now, I realize there's some commentary, there are some economists out there saying, "Oh, no. The Bank of Canada will not raise rates that much because it will do a lot of damage to the housing market." Well, I'm here to tell you that the last couple of 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.
Well, 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, and so the bank, basically, will have to ignore what's going on in the housing side as they crank interest rates to better tame inflation in the months and possibly years ahead. I think I'll just leave it at that, Mike, so we can get into more discussion, but thank you.
Mike: Okay. Thank you, Doug, and thanks, everyone, our first panel for your perspectives. We do have time for some exchange between the panelists and some of the questions that pop to mind that could trigger that conversation and interplay come from some of the things that the speaker said. Certainly, when Dave talked about density, it raises the question, how do we go about increasing density in a better way than we have in the past? When you talk about ending rules that block density, I'd be interested in knowing maybe specifically one or two good examples, and then clearly how to go about depoliticizing a process, a suggestion, that would be interesting from any of our panels.
Then, certainly, listening to Doug, he talked about the need to build labour supply. I'd be interested to know if there's any tips that any of our panelists would have, including Doug, for how we could go about really improving building capacity because that is an issue. If we have to build more, we also have to have the infrastructure of building capacity and labour supply and other mechanisms for that supply. Maybe I'll leave it there just as a few of the things that I pulled out of that conversation, and open it up to our panelists if they want to talk to any of those points.
Dave: Mike, maybe I'll start, it's Dave here, and thank you very much, some great points there. Just a question that I think you raised around inventory from a GTA perspective to highlight for the viewers. Last month when we reported new home sales, there was one month of inventory for single-family homes and about two months for high-rise products. A healthy market is six to nine months so there is a real shortage in supply that we're seeing and I think that is a signal and a catalyst for the challenges that we're facing.
I certainly hear Doug around the opportunity that I hate to use rising interest rates in that context but 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 that we need to address this from a fundamental perspective when we get at the core, and Mike, to your question, some of the things we could look at is rezoning within the city of Toronto as a specific example, 70% of the land is designated for single-family. There's a huge opportunity for density.
As you asked about, it takes 10 to 11 years to complete a project depending on whether it's a single-family or high-rise. A large portion of that, about 40% is the time spent for approvals. There's a huge opportunity to change that and to speed that up, and also making sure that people aren't opposing new development just because they can and there's the vehicles within the system to do so, that opposition must be based on fact, not perception. Those would be a couple of key things that I would mention.
Mike: Thank you, Dave.
Scott: Quick point, Mike. Doug raised the labour issue, and it's a very important one. A specific idea that has occurred, that has been led to results in Nova Scotia around that in Halifax and I think could serve as a bit of an inspiration in other places, is that the Lebanese building community in Halifax, the Lebanese Canadian building community are actually working to bring people in from Lebanon to enter the Canadian immigration system. They are being very quickly skilled up through the Nova Scotia Community College, such that they are able to, in building trades as required, and they are able to help build housing, new housing for all Nova Scotians.
I think there's a great symmetry to that in some ways as part of our narrative is that the new Canadians coming here are actually being engaged in building the housing that all Canadians need. In fact, immigration continues to be part of the solution broadly for Canada, but specifically, on the housing side, if we combine our relatively open immigration policy with our community college systems, I think a little bit of innovation in provincial governments and the community colleges and our immigration system could address this issue and bring in people who can help us solve this problem.
Mike: Thank you, Scott. I think that's a great suggestion. I'll throw out another one. This is borrowing from one of our speakers in the second panel. I know Tridel has its own organization, BOLT, Building Opportunity for Life in the Trades. That is actually aimed at high school and college-age youth and giving them a career option in the building trade.
That's another avenue too of doing a better job of mining the youth talent that we have in this country and channeling them more into that direction for labour supply. I think it's a great topic to talk about labour, and I appreciate that Doug raised the topic because the industry has a constraint issue. It can only build so much. There's lots of starts, but the pace at which it finishes and completes is an important part of the supply solution here.
I think we have just run out of time. I'm going to call it there for now rather than encourage more exchange. There may be opportunity for more of that later. I will thank our first panelists really for their participation and raising a few points, and also that last couple of points that we exchanged on. Now for panel two, this is our builder panel. These are among my clients across this country that build virtually 90% of the residential housing, whether it's for sale or for rental, in this country. Therefore, they're important members for this discussion.
We brought together really leading residential home and rental apartment builders that span regions. We couldn't fit enough cities in to properly cover the country, but this is good flavor from West to East and back.
Neil Chrystal, President and CEO of Polygon Homes Limited based in Vancouver. Jim Spatz is the Executive Chairman for Southwest Properties Limited in Halifax. Michael Owen is a co-president at Mondev in Montreal. Jim Ritchie is the Chief Operating Officer for Tridel Group of Companies here in Toronto. Let's get started. We'll go out to the West Coast. Neil, Polygon is one of the top residential builders in Vancouver. As its CEO, what do you think that City of Vancouver is doing right and what could it do better?
Neil Chrystal: The city of Vancouver isn't doing much well, to be honest, because approvals are just stuck in the mud. A lot of comments were made by Dave Wilkes which reflect on what's going on in the West Coast here, but basically, we're in a situation where we can't get new projects approved. It's taking two or three years. It is a nightmare. The title of the presentation is housing supply and how do we fix it?
Dave touched on so many good points, but one of the things that I see all the time is, and I should say that we have a provincial government that, like Ontario, is driving change to try and fix the supply challenge. A couple of ideas are, again, prezoning areas where there's an OCP in place that councils already endorsed. There's no reason to go through a re-zoning process. Also, allowing the senior governments, the provincial government, to establish housing targets for the many different municipalities that we operate in, which is about 26 in greater Vancouver, but set targets and tie funding of transit to those communities so that if they deliver on housing starts, reward them with whatever they need in terms of new transit.
The other thing that gets lost in greater Vancouver is the need for regional planning. Often, the province has ideas, but they have to navigate their way through 26 different municipalities. It's very challenging. One last thing is just tapping into what Doug Porter said is we're coming out of a very robust sellers' market and the market is definitely shifted with interest rates. All these supply mechanisms to improve the market, in the short term, it's going to be coming at the wrong time. We're seeing the market shift in front of our eyes and 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 just reflect if it's a good time to buy.
What that means to us as builders is that we've got to be more creative and finding ways to make our homes a little bit more attractive in a market that might be just one for questioning of buyers because if you double interest rates, you're squeezing a lot of the first time buyers out of the market but maybe I'll just leave it there. I will say this, in 2021, we had the highest number of sales ever on the MLS. We hit the highest prices ever, and we had the highest level of immigration.
The one that we didn't hit the highest amount was new housing starts. In fact, we were a couple thousand below the previous year. What makes matters worse is so far this year through the first three months that we have data for, housing starts are actually 41% lower than they were a year ago. The problem isn't getting better, it's getting worse, and it's really time for change on the supply side.
Mike: Thank you very much, Neil. Now over to you, Jim Spatz. Is this just a big city problem in Toronto, Vancouver, and Montreal? What is Halifax doing right versus what it could do better in the eyes of you and your team at Southwest?
Jim: No, if you're asking me if lumber is cheaper in Halifax, [chuckles] I don't think it is, we face the same construction inflation and the very same interest rates that we just heard about from Neil in Vancouver. What's different in Halifax is that we were a stable city that didn't grow much and didn't shrink and in a province that had a population that shrunk a little bit each year and got a little bit older each year, and that has reversed in the last few years.
We have growth that surprises everybody, me, us, we have a population that's increasing now and getting younger, and we've gone from a city that was economically stable because much of our economy tied back to government in some way, government directly, healthcare, universities. and we've become a city that is more entrepreneurial and has a booming tech sector, so we just changed a lot inside the last five years.
Other than up until the last, the last year approvals were dreadfully cumbersome and slow and we kept falling behind significantly in what was already a deficit in terms of total housing. Our deficit in total housing in Halifax is close to 20,000 housing units, which is roughly five years of our historical supply. We are in a large hole that is just getting tighter because a lot of people now want to live here.
My sense is, beyond the level of approval processes and municipalities' incenting or getting in the way of creating housing, we have a new issue that Neil just touched on which is that now, and in Nova Scotia, the approval process just inside the last year has become much more accommodative.
New provincial government that created a housing tax force came down with a heavy hammer on the municipality, Halifax, with regard to approving things but in the face of that, we saw and are seeing, and this is not a news flash, we're seeing construction inflation at an unprecedented level where, I'm sitting in my office looking at our latest downtown project next door, and we will be north of 15% above our budget. That is a good number in the context of if we were starting today, it would be significantly higher. At the same time, a massive increase in interest rates off of a very, very low-interest environment, that took care of a lot of the construction inflation.
Here's 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 trying to mitigate great inflation, which I'm not sure is the most effective tool, given that it's mostly supply-side inflation, interest rates have gone up significantly, and so my sense is if something is going to affect increased supply today, it's trying to mitigate those kinds of issues.
My mind goes to something like federal and provincial governments taking a break on HST with regard to new housing. With regard to rental housing, everybody knows that it's a cost but there's no input tax credit, so it's simply a cost. Doing something bold. If this country wants to create more housing, the issue today, in addition to how governments act with regard to planning, approvals, and policy needs to be dealt with, but on top of that, now, we have a new issue. If governments want to create more housing, they should do something bold, that actually takes the cost down, HST, all the municipal fees, all those sorts of things. Otherwise, I think you're pushing with policy and accommodative planning into a world that has changed too much to permit housing to catch up.
Mike: Thank you, Jim. Now over to you, Michael. Mondev is one of the largest rental apartment builders in Montreal, and you are a co-owner and co-president. How would you address affordability better in the city of Montreal?
Michael Owen: Well, it's interesting, as far as big cities are concerned, Montreal has remained affordable on a relative basis. I fear that's ending, and I think it's ending very, very quickly. Some of the reasons are a lot of what's happening in Montreal seems to be going in the wrong direction. Density has become a fearful thing to discuss. Whether it's because of the politicization of the approval process, or whether it's local governments that are afraid that they're going to get voted out, I don't know, but density is going in the wrong direction in Montreal. We own sites that we bought with the anticipation of building X number of floors, only to find out a few months or a year later, the city downzoned the sites, and we're talking about stuff in the heart of the city, which really makes no sense.
In terms of the carrot and stick measures that I think are great ideas, in terms of this permitting bottleneck, I would keep it very simple. I would just say you have X number of months to deliver a permit, like Domino's Pizza, if you don't get it in 30 minutes, it's free. I think the same thing should apply to building permits. There's no reason that it should take years. I also like the idea of setting a minimum number of units that a big city like Montreal, we should be approving a certain number of units based on our population. If we fail to hit that, or if the city fails to hit that, there should be some consequence.
All this stuff, and Jim just said it quite well, these are the old problems. The new problem is how do we build on budget? We almost can't anymore. Budgets have gone completely haywire, costing has increased faster than anybody can really understand why, so this is the new problem. How do we deal with this? I actually think densification is an interesting way to deal with this because, let's face it, once you started a project, if you could add five floors, there's a certain economy of scale that would be very, very beneficial.
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. I think densification is a solution there as well. Obviously encouraging more people to come and work in the construction industry is great, and I think we should definitely do that. It takes time, it takes a lot of time and I don't see us being able to ramp the industry up fast enough to deal with the shortage of supply that we have.
In terms of a more immediate response, my feeling is the big victim in all of this is the first-time buyer. Real estate exists through somebody's life in varying phases. You buy a small property and you trade up, and you trade up, and you have kids and you trade up again. I think about it from my own personal experience, I wouldn't be able to afford the house I live in today if I hadn't bought the first four before that. We've got these first-time buyers that are really almost barely able to get into the market, and I don't think that we fully appreciate the long-term impact of this "lost generation".
A recommendation that I think could have an immediate impact, and it's one for the banking community, I think age-based amortization is something that would be very interesting to young Canadians. If you're 35 and under, you get your 40 years. It's going to reduce the payments. It's going to make it more affordable despite increased interest rates and despite increased costs.
You can take it down from there. If you're between 35 and 45, you get a little bit less, and then 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. I don't think we can wait for other measures, I think we have to do something now. It mitigates the affordability problem because at least they're going to benefit from the increase in prices that we've all been doing for decades really. Those are my thoughts. Thank you very much, Mike, for inviting me here. It's much appreciated, and if there's any questions, happy to answer them.
Mike: Thanks very much, Michael. That's the first time I've heard that suggestion of age-based amortization. I think it's got a tremendous amount of merit in terms of helping people get into the market. It doesn't relax stress-test rules, which ensures they have an adequate amount of equity so that they cushion for interest rate increases, but it gives them a lower payment. I think it's an interesting idea to come out of today's discussion.
Now I'm going to turn it over to Jim Ritchie at Tridel. Tridel's built 80,000 rental and condo units over many decades, almost all in Toronto, yet prices are higher and approvals are slower than virtually every other city in Toronto. Any suggestions, Jim?
Jim Ritchie: Hi, Mike. Thanks very much for this opportunity today. Now, you told me I'm going to go last so I wasn't sure whether that was a good thing or a bad thing. I figured by the time I got to speaking, everybody would have covered off the salient points and we're pretty much there. I'm going to focus specifically on the Toronto market because that's what we know best, and in particular, the condo marketplace.
I've often framed our product as being in a category of relative affordability. I say that only in contrast to what we see in our Toronto market in other forms of housing. In particular, a single-family home in the city of Toronto just this past April, the average price through the Toronto Real Estate Board was just under $2 million, about $1.950 million. In terms of relative affordability, we contrast that what is happening in our condo market, even though it's a bit of a different lifestyle and doesn't fit for everybody.
Well, there was 3,300 condominium unit sales in the first quarter of this year, and in the city of Toronto, they sold at an average of about $1,435, which means anything at 700 square feet, which isn't too big, and larger, was over $1 million. I just bring that to the conversation today simply to talk about the erosion of affordability. I think what's interesting in the speakers before me, we all seem to have these similar challenges no matter where we are located in the country.
How do we tackle this? Well, there's a number of ways. That journey is not going to be easy. We heard from Dave in Ontario, and in particular, with that Housing Affordability Task Force. He pointed out, there's a number of initiatives. You can boil that down to five or six. He spoke to some of them but I think, clearly, this is not something that's going to happen without intervention from the province.
The municipalities on their own are not going to affect substantive change for a whole number of reasons I think we're all familiar with them, but number one, 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, et cetera. We need to take a hard and strong look at just density alone and I think you've heard that from everybody.
In our area, we deal with a number of planning and urban design rules that affect density, whether it's with the building shadows and setbacks, whether we're dealing with the preservation of neighborhood requirements and there's all sorts of those, these magical angular planes that crop up, and general design guidelines. We need to reduce and streamline planning and urban design rules straight out.
The Ontario Land Tribunal which has had a number of names, but the current one now is the OLT, there's got to be a way to weed out appeals aimed purely to delay projects because that exists. Ratepayers are extremely organized and have been quite effective in terms of project approval delays. We need to reduce the time that the tribunal issues decisions. I think it would be helpful if adjudicators could award costs which typically is not the case here in Ontario. Frankly, they need that-- the province needs to increase funding, they need to hire more staff to make this process quicker. Those are some of the bigger picture items.
In our organization, and I'm sure with the other builders on this call today, the enemy is time; time to market, time to completion. We really have to address the approval process and all the appeals that are generally aligned with that. The timelines are a big one. I've talked about the planning and design rules, just the nature of those rules that create more complexity of the communities that we design and build, both in terms of the residential component and pretty much now the mixed-use varieties that we see in our marketplace.
Dave, earlier mentioned about soft costs. It's, to me, absolutely astonishing that we can go from a number that I already thought was big, which is 25%, to something closer to 40%, but that, regrettably, is a reality that's coming to our marketplace. We've had proposals from the city to increase development charges by 49%. Parkland dedications that are going from what typically would be 10% of the value of land, from somewhere between 15% to 25%, depending on some new parameters that they're proposing.
Last fall we had inclusionary zoning brought to the forefront which is approximately a $60,000 a unit increase to the overall market condos. We've just looked at increases in are about 8$ to $10 a foot on our construction cost, just to deal with the new sustainability requirements that were introduced this month. Earlier in the year, we had new foundation drainage policies that add another $15 a foot to the construction cost. We have to continue to work with our municipalities.
It's a challenge. The goal of affordability is something that I guess we've heard from everybody on the call today, that's more and more difficult. I also heard enforcing minimum customer service standards in terms of these applications. The city here has that. Regrettably, they're not put into effect particularly well, and just getting basic approvals put through or applications on various permits. The city staff is we don't have enough, and regrettably, that's a challenge that doesn't go away with a number of different departments. For the sake of repeating myself, I think those are the big picture items and I'll turn it back to you, Mike.
Mike: Thank you very much, Jim. Really great points. There is a question about adequate staffing and infrastructure in the approval offices in cities across the country. You would think that would be easier to manage if we just funded it. I'm going to thank all the builder panelists for your perspectives. You and your peers, as I said earlier, build the vast majority of new homes to globally high standards, award-winning standards in this country, and are a critically important voice on supply and affordability strategies alongside policymakers at government levels.
In closing, I'd like to say a thank you to those listening in, for joining us. We hope that you enjoyed this session. It's meant to be constructive and to really get from the horses' mouth so to speak from the people in the industry as well as the builders, get their honest opinions, and I think we got that today with some interesting suggestions. If you'd like to continue the discussion or have questions, feel free to reach out to myself or your BMO representative. This concludes our call today. Thank you. Be safe and take care.
Mike Beg
Head, Real Estate Finance
Mike Beg as Head, Real Estate Finance, Canada is responsible for management of BMO’s Commercial Real Estate Finance group and its client relationships across …(..)
View Full Profile >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.
Subject matter experts:
The Honourable Scott Brison, Vice Chair, Investment and Corporate Banking, BMO Capital Markets.
David Wilkes, President and CEO of the Building Industry and Land Development Association, or BILD.
Douglas Porter, Chief Economist, BMO Financial Group
Builder panel:
Neil Chrystal, President and Chief Executive Officer, Polygon Homes Ltd.
Jim Spatz, Executive Chairman, Southwest Properties Ltd.
Michael Owen, Senior Partner, Mondev
Jim Ritchie, Chief Operating Officer, the Tridel Group of Companies
Following is a summary of our conversation.
Affordable housing = economic growth
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.”
A cultural shift
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.”
Builder concerns
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.
Toronto
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.”
Vancouver
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.”
Halifax
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.”
Montreal
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.”
Transforming crisis into opportunity
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.”
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