In this week’s Konfidis Insights, we dive into the lack of new housing supply, the makeup of the limited new construction starts, and consider the drivers behind this matter. As background, while home prices have experienced a knee-jerk pullback to interest rate spikes, the long-term fundamental supply and demand picture for Canadian housing and single-family rental have significantly improved.
Summary of this Konfidis Insights:
Single detached new supply has experienced a sharp decline as a proportion of total new housing starts, in contrast to a stark rise in condo unit starts; this trend represents a mismatch to homeowner and renter preferences for larger-format housing.
Aside from the type of new housing starts, the total number of starts is not keeping pace with household formation, and the shortfall is compounding. And as a result, the demand for preferred housing alternatives is far outpacing supply.
As an example in London, Ontario (see Konfidis’ exclusive offering of 22 Bond Street), annual total housing starts as a percentage of annual changes in the population base has declined from greater than approximately 60% prior to 2013 to less than 40% since 2016.
First off, we look into historical housing start data provided by Canada Mortgage and Housing Corp. (CMHC). All data and related definitions can be found on CMHC’s website here.
From this data, we can see a stark shift in the type of dwelling that makes up annual housing starts. For example, across Canada’s CMAs, single detached housing starts as a percentage of the total housing starts has declined sharply from approximately 50-60% in the 1980s and 1990s to less than 20-25% in recent years. Toronto, as an example, has followed a similar trend. (See the chart below)
Source: CMHC - Monthly Housing Starts and Other Construction Data Tables
With this decline in proportional single detached housing starts, condo units have emerged as a much larger part of the new housing supply mix. Across Canada’s CMAs, the proportion of condos compared to total new housing supply has increased from less than 20% before 2000 to greater than 30% since 2010. Moreover, in Toronto, condos have represented greater than 40% of new housing starts since 2008, increasing to greater than 50-60% in more recent years. (See the chart below)
Source: CMHC - Monthly Housing Starts and Other Construction Data Tables
In contrast to this shift from new supply of single detached homes to condos, demographic trends and changes in social preferences (including the prevalence of work from home) translate into a dominant millennial cohort seeking larger format housing – seeking to trade “shoebox in the sky” urban condos for larger format housing with extra bedrooms for family planning and at-home offices. This trend further bolsters single-family rental demand in Ontario’s secondary cities outside of core Toronto, for example. This subject is further detailed in Konfidis’ “Why SFR? Take another look” primer article available here.
Not too dissimilar to Canada’s CMA composite and Toronto, the London housing starts data tells a similar story. Since 2000, new single detached home starts as a percentage of total new housing starts have decreased from 70-80% to approximately 40%. During that same time, the proportional of new condos and rental apartment units starts are up significantly while previously de minimis. (See the chart below)
Source: CMHC - Monthly Housing Starts and Other Construction Data Tables
After assessing the type of dwelling mix for new housing starts, we also wanted to put new housing starts in context with population and household formation growth. In this regard we analyze population data from Statistics Canada (a reliable metric with historical data which has a strong, albeit not one-for-one, correlation to household formation metrics).
Across Canada, the data presents a story of relatively stagnant housing starts in the face of accelerating population growth. (See the chart below).
Source: For housing starts data: CMHC’s Monthly Housing Starts and Other Construction Data Tables for total census metropolitan areas; and for population data: Statistics Canada for All census metropolitan areas and census agglomerations, Canada.
Similarly, in London, annual total housing starts as a percentage of annual changes in the population base has declined from greater than approximately 60% prior to 2013 to less than 40% since 2016. Further, while annual housing starts have ranged between approximately 2,000 -4,000 units in London during 2002 to 2019, since 2015, population growth as more than doubled to 8,000 to 12,000+ compared to the decade prior. (See the chart below)
Source: For housing starts data: CMHC’s Monthly Housing Starts and Other Construction Data Tables for London, Ontario; and for population data: Statistics Canada for London (CMA), Ontario.
We are also pleased to share a recent in-depth article by The Globe and Mail, pulling from data from RBC Economics and Canada Mortgage and Housing Corp. (CMHC), provides additional insights on this topic. See full article here.
In recent years, it has typically completed about 200,000 new homes a year – standalone homes, condos and other types of dwellings. However, immigration and other factors will create about 240,000 new households a year between now and 2024, according to RBC Economics. This suggests that construction needs to quickly rise to levels roughly 20 per cent higher than in recent years simply to give all those new households a place to live.
Yet it only begins to address Canada’s structural shortfall of housing. “Even if we had 240,000 completions a year for the next few years, we would simply be meeting new demand, not reducing the gap that has already built up,” Robert Hogue, assistant chief economist at Royal Bank of Canada, said in an interview. If you look at what would be needed not just to keep pace with new demand but to address the shortfall that has accumulated over many years, the numbers swell to truly frightening proportions. Restoring Canada’s housing affordability by 2030 to the levels that prevailed around 2003 would require an immediate doubling or more of home construction rates, according to a recent study by Canada Mortgage and Housing Corp. In an ideal world, Canada would be completing an unprecedented 400,000 or more new homes a year, according to CMHC’s numbers.
And when comparing more recent housing start figures to population statistics, the article highlights an important social trend impacting household formation metrics.
And even that comparison doesn’t capture the extent of the shortfall because the average size of households has been steadily shrinking – the result of people marrying later, having fewer children and living longer. In the early 1940s, the average Canadian household had 4.3 people, according to RBC Economics. By 1981 that had fallen to just under three people. Today it stands at 2.4 people.
This has resulted in a tremendous upward push in the need for housing. To house the three-person households that were common in the 1970s, you would have required roughly 33 homes for 100 people. In contrast, to accommodate the same 100 people today, in households that average only 2.4 people each, you would need more than 41 homes – a major increase even if Canada’s population hadn’t budged at all.
The article then concludes with the following.
Bringing the country as a whole back to affordability is a mammoth challenge because of the huge shortfalls. The CMHC study estimates that Canada must build an additional 2.3 million homes between now and 2030, on top of what it is already building, to meet the 40-per-cent-of-income target. Achieving the more ambitious target of restoring the affordability levels of 2003-04 would demand 3.5 million more homes than the business-as-usual scenario.
With that backdrop, the push to build more homes to ease an affordability crisis is running into a critical problem: There aren’t enough workers to build those homes. (See recent Globe and Mail article here).
Long before the pandemic, residential developers were fretting about labour shortages in their industry. Skilled tradespeople were nearing retirement age, they warned, and relatively few young people were replacing them, opting instead for white-collar work in services. The situation is only getting worse, said Sue Wastell, president of Wastell Homes, a builder in London, Ont. It can take five weeks to get an excavator on site – one of the first steps of construction.
CMHC said last Thursday that, even under a best-case scenario of labour supply and efficiency, projected housing starts between now and 2030 will be nowhere near enough to make homes affordable in the largest provinces.
“There are not enough people who can build homes and address the housing supply gaps that exist mainly in Ontario, B.C. and Quebec,” the federal agency’s report said. “Labour capacity will be a big problem and it might make housing less affordable.”
But the goal of ramping up construction could be dead on arrival. For one, Canada is already building a lot more homes than in past decades, largely because developers have shifted their focus to high-rises and smaller units. As of the second quarter, more than 340,000 housing units were under construction, the most since at least 1990, according to CMHC figures.
“Canadian builders are effectively going all out, bringing as much supply to market as they can against constrained labour supply, material costs and development hurdles,” Robert Kavcic, a senior economist at Bank of Montreal, wrote in a research note in July. “So, the federal government’s goal of doubling the rate of construction over the next decade seems incredibly difficult in the best of times.”
As ever, labour is tough to find. In the second quarter, employers were recruiting for about 90,000 roles in construction, more than double what was sought before the pandemic, according to Statistics Canada. Despite those opportunities, job growth is modest. Employment in construction has risen by fewer than 20,000 people (1.3 per cent) over the past three years, lagging the overall pace of job creation. On Friday, Statscan said self-employment in construction had fallen by 52,000 people (12 per cent) over that span.
Alex Miller, the chief executive officer of Big Block Construction in Saskatoon, said his industry was “broken” and increasingly fragmented, with specialist roles needed at every point of the development process, from approvals through project completion. Rather than focus on labour, he said, the industry should find ways of boosting productivity, such as building more modular homes, which use prefabricated components.
“The definition of insanity is doing the same thing over and over and expecting a different result,” Mr. Miller said. “So part of me says, ‘Why are we looking at adding more labour?’ We’ve been trying to do that for 50 years. Maybe we should take a different approach.”
With all of this said, coupled with strong demand for Canadian housing, the long-term supply and demand fundamentals paint a very bullish picture for Canadian home price appreciation and single-family rental dynamics.