The road to restoring the balance between supply and demand in the residential market will be long and full of obstacles. The unaffordability of property could take root.
We need 3.5 million more homes than current projections to restore affordability by 2030, the Canada Mortgage and Housing Corporation (CMHC) tells us in a report released Thursday. This estimate “takes into account both the future increase in demand and the current situation of unaffordability”, she specifies. Two-thirds of the 3.5 million housing shortages are in Ontario and British Columbia, a little less than one-fifth of the required supply is measured in Quebec.
In the exercise, CMHC does not address ways to restrict demand or the impact of climate change on supply. We also stick to factors influencing affordability for the average household. In her report, she also recognizes that the real demand for housing will change depending on economic variables, in particular household disposable income and interest rates. In short, this is an imperfect reading based on sometimes subjective criteria, but the projections give an order of magnitude of an imbalance that is bound to grow.
We shine the spotlight on an insufficient supply to explain in particular the jump in the average price of properties in Quebec, all categories combined, of 16% in 2020 and 19% in 2021, the latter rate marking “the largest price increase ever recorded. since the real estate boards have been compiling this data,” points out the Association of Construction and Housing Professionals of Quebec (APCHQ).
Previous CMHC analysis looked at the causes of house price escalations. “We’ve seen demand for housing increase due to rising incomes and population growth as well as interest rate declines over a long period of time. But the offer did not follow. And the APCHQ added that the current housing shortage is responsible for the surge in prices on the resale market as well as upward pressure on rental housing rents.
In CMHC’s exercise, the objective is to restore affordability to the level seen in 2003-2004, when the economy was stable and housing costs represented a relatively small share of income. In Quebec, the housing cost/gross average income ratio hovered around 40% at the end of 2021, compared to 32% in 2003-2004. Elsewhere in Canada, it can reach or even exceed 60% in the warm markets of Ontario and British Columbia. CMHC applies a 40% shelter cost to disposable income ratio, a target corresponding approximately to a shelter cost/pre-tax income ratio of 30%.
It predicts that the number of households in Canada will increase by more than two million from 2021, reaching more than 17.5 million in 2030. That real incomes will grow by 17% by 2030, or about 2 % per year, and that the contractual fixed rate for five-year mortgages will rise to just over 5% in 2030. The housing stock will reach almost 19 million homes by 2030 if the current rate of construction continues. However, CMHC’s baseline scenario indicates that more than 22 million units will be needed to ensure affordability for all.
In Quebec, where overall housing unaffordability has rarely been an issue except since the start of the pandemic, the projected housing stock in 2030 is expected to be 4.57 million. However, 620,000 additional dwellings, or 14% more, would be required for an affordability level of 32% of average gross income.
Deficit of 100,000 dwellings
Earlier, the APCHQ published its estimate of the current structural housing deficit in Quebec. It calculated – also as an indication – at some 100,000 the number of missing dwellings. She also held that the imbalance came essentially from supply. That “the overheating and runaway price increases in the real estate market are the direct consequence of the scarcity of properties for sale compared to demand in recent years”, with a pandemic coming to exacerbate the situation. This lack of homes for sale “is reflected in a historic low in the listings/sales ratio”.
A balanced resale market can rely on a listings-to-sales ratio oscillating between 8 and 10. All categories combined, it stood at 2.8 at the end of 2021. To regain balance, taking a ratio of 9, some 58,000 offered properties were missing, she calculated.
On the rental market, bearing in mind that a vacancy rate of 3% is usually considered the equilibrium threshold without necessarily reaching a consensus, the analysis shows that there was a shortage of approximately 15,000 rental units. The APCHQ recalls that “it has now been four years since the vacancy rate for privately-initiated rental housing has been below this threshold [de 3 %], indicating a shortage for this purpose. As a result, more sustained rent increases are observed. CMHC estimates changes in the average rent in Quebec at 3.7% in 2020 and 3.6% in 2021”.
For its part, the deficit in social housing was estimated at 37,000 as of December 31, 2020, according to data taken from the waiting list of a public HLM or from a supplement to the regular rent of the Société d’habitation du Québec. . That is a total estimate of the current structural deficit of 110,000 housing units, reduced to around 100,000 to take account in particular of the fact that these three components of the deficit do not add up directly due to substitutions.
Obstacles in construction
The response to this imbalance necessarily involves the construction industry, a sector struggling with a shortage of manpower. In Quebec, there are 4.5 construction workers per dwelling, against a historical average of 10.2, indicates the CMHC. On Friday, Statistics Canada pointed out that the number of job vacancies reached a record level in several sectors in Canada, including construction, which saw this number reach 89,900 in April, up 15% compared to March and 43% compared to April 2021. In addition, the pandemic and the invasion of Ukraine have created supply problems causing construction costs to explode, which would also be pressured by a sudden increase in supply. If the increase in the price of a new house in Quebec amounted to 17% in 2021, these factors should translate into at least an equal increase in 2022. And we must add to this the rise in interest rates, which puts pressure on the financing costs of real estate projects.