MNI INTERVIEW: Canada Home Agency Sees Deeper Supply Shortfall

MNI (OTTAWA) - Canada's affordable housing shortage is seen worsening over the rest of this decade as a construction industry led by smaller firms struggles to find workers and capital to double the pace of starts, the federal housing agency's chief economist told MNI. 

“There isn’t necessarily enough idle labor to just double the pace of housing starts. We’re going to have to find new ways to do that, whether it’s using robotics in factories to produce homes, or whether it’s 3D printing,” Bob Dugan of CMHC said on MNI's podcast. 

“One of the struggles there though is in Canada, unlike some other countries, a lot of our builders are fairly small-scale operations,” he said, contrasting it to U.S. firms often listed on major stock exchanges. “For the smaller enterprises, capital deepening isn’t an obvious thing to be able to do.” 

Housing demand has grown by leaps and bounds for much of the period since the global financial crisis of 2008, encouraged by Canada's stable banks that continued to lend and more recently by record immigration. While sound regulation has kept Canada from the kind of crashes seen in the U.S. and parts of Europe, the need to boost housing supply rather than manage demand has contributed to a larger imbalance in the market, he said.

THE BIGGER WORRY

“My bigger worry honestly is more in the longer term and the issue that the housing market is fundamentally under-supplied,” Dugan said. 

“We estimate that by 2030, the shortage in supply is going to grow and not get smaller than where it is today and will grow to about 3.5 million units," he said. “Our forecast is for housing starts over the next five or so years to average somewhere between 200,000 and 225,000 starts per year, which is a reasonably strong pace of housing starts, but we’d have to more than double that to eliminate the supply gap.”

Rental markets have also jumped as families struggle to move up the property ladder. Rates charged when a unit outside of rent control changes hands rose 24% nationwide last year, Dugan said. 

That kind of housing inflation is one reason the Bank of Canada has stuck to quarter-point rate cuts while the Federal Reserve opened with a half-point move. Anger over the cost of living is also threatening the end of Justin Trudeau's nearly decade-long run as prime minister. (See: MNI INTERVIEW: BOC Open To 50BP Oct Cut: Ex Adviser Williamson)

CUTTING TO NEUTRAL

In the past even modest rate cuts often unleashed a fresh housing boom, but sales have been tepid since the Bank began cutting rates in June. Dugan said falling per-capita GDP has been holding buyers back but some momentum will return as the Bank keeps cutting, Dugan said. 

“We’ve had a fairly weak economy for the past year or so,” he said. “To many households, it probably feels like a recession.” (See: MNI INTERVIEW: BOC Needs Faster Cuts, Labour Congress Says)

Governor Tiff Macklem will cut his overnight rate from today's 4.25% to somewhere around neutral, Dugan said. “We think that’s where the Bank is going to cut to, about 2.5% and they can go lower if there’s a recession or something bad happens.”

“Inflation is back down closer to target, which should give the Bank of Canada confidence,” Dugan said. "Even if growth does accelerate a little bit, there’s enough excess capacity that it shouldn’t re-ignite inflation immediately, at least not to levels that would require the Bank to pause.”   

With the yield curve inverted there will be less relief for mortgage borrowers like those seeking the popular five-year fixed product, Dugan said. Others who are renewing also face a "cliff" because their new rates will be much higher, he said. Bigger monthly payments are “going to squeeze incomes at the margin,” Dugan said, limiting gains in housing and the wider economy.