It might not seem like it, but Canadian real estate is in the middle of one of the most significant supply booms ever. Canada Mortgage and Housing Corporation (CMHC) data show 2021 housing starts made a big jump. More importantly, the surge of new home construction is beginning to reach the market. New home completions have hit one of the highest levels ever. One Big Six bank even sees it breaking the 1970s high this year.
Canadian New Home Starts Were Up 21% In 2021
Canadian housing starts fell recently, but they’re still much higher than they used to be. The seasonally adjusted annual rate (SAAR) of starts hit 261,000 homes in December. It was down from the SAAR of 268,000 units a month before. Even with that drop, this is much higher than pre-pandemic data.
For 2021, actual starts hit 271,000 homes, up 21% from the previous year. Starts are down when adjusted for seasonality, but actual annual starts are just under the 1976 record. “Of course what really matters for home supply is a much less-followed figure— home completions,” said BMO chief economist Douglas Porter.
Canadian New Homes Delivered Almost Hit 1970s Record High
Canada saw a lot of housing supply delivered — even with material and labor shortages. Canada saw 223,000 homes completed and delivered in 2021, the highest level since the early 1970s. Porter estimates the gap between starts and completions is running at 48,000 units. This would be the largest cap on record, with him estimating a typical gap is just 8,000 units. Running at six times the lag is quite the delay, most likely attributed to labor and supply shortages.
Canadian Housing Starts Vs Completions
Just how much housing is this? Household formation is harder to estimate than most think. Canada is estimated to have 10.5 million families in 2021, up 120,000 from 2020. The number of homes completed is 2.1% of the number of households, and 2x the growth of new families. However, there is a catch.
The number of families doesn’t include the number of people considered “not in a census family.” Adults living with another family, renting a home, living with their parents/kids, or on their own, are in this category. All of those numbers don’t contribute to more housing demand, except for those living on their own.
Multi-generational families mean a significant share of people don’t take up more housing. Ditto with people renting a room in someone’s house. Considering 4-bedroom apartments are pitched as 4-tenant homes to investors, the pressure on supply may be overstated.
Canada Is Likely To Break Record Housing Completions This Year
Next year is forecast to see even more completions. Canada may deliver even more units next year, as supply chain pressures ease. “…this year could easily see a record-high number of units completed (1974 holds the record at 257,000),” says Porter.
There is undeniably a shortage of inventory for housing in the resale market, which is a tricky issue. At the current rate of home price growth, few would sell if they planned to downsize or sell surplus homes (e.g., pied-à-terre, urban vacation rentals, cottages, etc.). If home prices are rising at nearly a year’s rental yield per month in the middle of nowhere, that would be silly. This obfuscates the issue of how much housing is actually being inefficiently used.
As interest rates rise and home price growth slows, more inventory tends to appear. Especially if home prices contract, as was the case in Toronto and Vancouver during a brief dip in 2017/2018. All of a sudden, carrying costs were higher than gains, and many people were in a hurry to dispose of them. At that point, Canada will find out how low supply is.
Builders keep telling everyone that there is a supply shortage- they are talking their book ( creating a visual that generates more profits for themselves). There is massive speculation happening. It never ends well when interest rates start rising. The fire exit is very small when someone yells fire in the theatre.
Now that residential real estate has been financialized and considering how far out valuations are, we may be surprised at how fragile and sensitive Canadian real estate has become.
A very large number of dwellings are now investor-owned (rather than end-user owned) and they own for two reasons only – expected appreciation and steady fixed cash flow – and both are linked to valuation/price. If an initial price decline occurs and a new trend downward appears imminent, many owners of investor-owned dwellings would be very motivated to sell (and may move quick).
Pile other potential sellers/holdouts on top of that – retirees or near-retirees looking for top dollar; those who bought too much house in the last few years and worried about being underwater; possible casualties if a recession ensues; etc. – and there could be quite a waterfall of new listings.
Suddenly, we’ll see that supply was never the issue! It was house hoarding & holding out (caused by policies that produced a ‘never can lose’ market psychology) that lead to ever lower turnover. Turnover is the issue – everyone wants to hold onto the golden goose…until it becomes rotten.
At the same time, a larger than normal amount of future local end-user demand was pulled forward due to FOMO.
With new listings growing (and actual supply growing at a significant clip), investor demand waning, and local end-user demand diminished by being pulled forward, prices will likely continue to erode. Any interested buyers are likely to ‘stand back’ as prices drop to find their new fair equilibrium that is better supported by fundamentals.
In all this, a persistent level of consumer inflation will likely impede the usual options of “massive fiscal injections” or “dropping rates to .25%”, especially if the rest of the world is still in okay shape.
Never before in the history of humankind has a bubble continued indefinitely. This time will be no different. Eventually, these sorts of imbalances can’t be continued and the elastic will snap back. The big question is – when might this happen??
(And, the market likely won’t ‘snap back up’ very quickly because market psychology will be changed and lead to generally lower demand than previously seen along with increased levels of inventory turnover and supply itself). Essentially, the market will have had it’s long stretch of fun in the sun bubble, and it’ll go back to being just a bunch of regular old sloppily-built Canadian houses that require significant spending just to maintain their ‘value’.
You hit the nail right on the head.