Politicians and the public alike hit the panic button when CMHC said in 2022 that 5.8 million new homes were needed by 2030 to bring the price of housing back to affordable levels.
CMHC projected that, if current rates of new construction continued, the housing stock would increase by 2.3 million units between 2021 and 2030. To restore affordability, the Crown corporation’s analysis suggested flooding the market with an additional 3.5 million units on top of the 2.3 million required to meet demand. That would mean building an additional 500,000 units per year – more than doubling the current rate of construction – which they assume will drive down prices. Despite the dramatic call to action in the CMHC report, only 240,267 (as estimated by Statistics Canada) housing units were built in Canada in the year (2023) following the CMHC report. In the decade 2011-2021 Canada built an average of only 204,000 units.
The CMHC proposal is now being questioned in a new paper written by Canadian Housing Evidence Collaborative (CHEC) Industry Professor Steve Pomeroy who suggests the target is not only unachievable but that it is leading to bad policy, which overlooks the critical role of excessive demand as a cause of rising prices and rents. In fact, Pomeroy said the real purpose of such an inflated figure was to scare all the players – from politicians to developers to the public – into a build, baby, build strategy which he believes to be flawed.
“Although they never say so explicitly, CMHC has promoted the 3.5 million number to stimulate actors across the system to up their game – municipalities to approve faster, builders to build more, skilled trades to grow the construction labour supply, immigration officials to similarly target skilled labour and industry to innovate to lower costs and improve efficiency,” Pomeroy wrote. “Unfortunately, despite the rhetoric that we need a massive increase in supply and an “all hands-on deck” level of effort, there are warnings of slowing and stalling of new construction.”
Pomeroy said the 13% decline in housing starts in 2023 from a recent peak in 2022 reflects the fact that markets are likely to behave contrary to the CMHC plan.
Pomeroy said CMHC needs to produce a more credible report, with realistic targets, to guide policy for the remainder of the decade.
“Revised minimum supply targets should be established and used in both provincial-municipal planning as well as in federal initiatives like the Housing Accelerator Fund (HAF),” he said. “Currently there is a complete disconnect between the HAF (Housing Accelerator Fund) targets and the CMHC 5.8 million home ambition. But any recalibration of supply targets must also be supplemented and complemented by policies to better manage demand factors, especially immigration levels.”
Pomeroy said the failure of the system, particularly with regards to developers, to achieve even half the CMHC target for 2023 should come as no surprise.
“Developers and builders are not motivated to flood the market with excess supply that would reduce potential sales profits; indeed, their inclination is the opposite – to stall until there is greater certainty and potential for new supply to be absorbed at a higher rate of return on investment.”
Other flaws in the CMHC estimate include:
- A failure to recognize the impact of vacancy decontrols in many provinces. When an existing renter moves from a rent-controlled unit, the vacancy decontrol regulation permits an increase in rent to current market levels.
- An assumption that existing homes filter down and become cheaper over time.
“It is unfortunate that governments, at both the federal and provincial levels, reinforced by the CMHC supply analysis, have bought into the chronic undersupply argument, and responded only with a strong supply side bias (e.g. the Housing Accelerator Fund, removal of GST from new rental construction),” Pomeroy wrote. “They have been led down this blind alley by the theoretical but unrealistic CMHC supply estimate.”
Recommendations
- Implement a more carefully managed process for international students and temporary workers to better manage and calibrate demand, especially for rental housing.
- To address the erosion of low rent properties, the National Housing Strategy (NHS) must be augmented with a funding mechanism to enable non-profits to acquire and preserve existing low-moderate rent properties – an approach that is more cost effective and quicker than new supply.
- An expansion of income assistance and housing allowances (Canada Housing Benefit) can be more effective in directly and quickly addressing high shelter cost burdens for many renters that are already adequately and suitably housed.
- The provinces with vacancy decontrol should limit price increases for vacant rental units (including exempting recent and newly constructed properties to avoid creating a supply disincentive).
To manage excessive home price escalation caused by existing owners with windfall equity gains, the federal government should introduce a property transfer tax on home sales, paid by the vendor, and use the revenue to support additional affordable housing programs.