Housing analyst Will Dunning likens Canada’s housing affordability challenge to a game of musical chairs, with the pandemic real estate boom having sped up the music.

He says it is simple supply and demand economics.

“There are more people running around than there are chairs,” Dunning told the Star.

Dunning cites reasons for the shortfall that are similar to those often quoted by the homebuilding industry and real estate experts: land use plans that limit development; delayed building approvals; delayed infrastructure such as water, sewage and roads and government fees on new construction.

“Those costs create a big disincentive to offering new supply,” he said.


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But a less obvious contributor to the shortfall are the frequent changes to mortgage rules, including the mortgage stress test, said Dunning in a report released this month called, Not Enough Places to Live. He says at least 10 per cent of the shortage in supply is probably due to mortgage rules.

“In the last decade I’ve lost count of each change in the mortgage policies,” said Dunning. “Each one of those has made it incrementally harder for people to buy new and resale homes, so incrementally mortgage policies have become a big impediment to new housing supply as well.”

Suppressing demand also limits supply as builders wait for prices to rise in order to charge enough to meet their costs, he said.

The latest of those mortgage qualification changes took effect Tuesday when the mortgage stress test gets an update. Since 2018, consumers have had to qualify for loans at two per cent more than the market rate their bank actually charges or at the Bank of Canada’s five-year rate (currently 4.79 per cent) — whichever is higher. Under the new rules, they have to qualify at two per cent or 5.25 per cent.

It’s a change that will reduce housing affordability by about five per cent, said James Laird of CanWise Financial.

While he doesn’t object to the mortgage stress test, the urgency for this change has probably already passed. Housing sales have slowed in the last month and prices probably aren’t rising quite as quickly as they were for the last year.

“This is a reactionary measure to the superhot housing market that we saw coast to coast. A lot of that heat has already left the market. It’s a reactionary measure that you might argue isn’t required any more,” he said.

Although the stress test applies to all buyers, the most likely affected group of consumers will be first-time buyers, said Laird.

“They often max out their affordability to try and get into the market. The ones who are just on the edge of being able to qualify for what they wanted can no longer qualify. They’ll have to buy a little less house, they’ll have to wait a little longer for their incomes to go up or save a little longer for their down payment, but something will have to give,” he said.

Dunning said the shortfall in housing supply is likely to get worse as Canadian immigration ramps up again, increasing demand.

“We had 1.4 per cent population growth in 2018-2019. I think it would be reasonable to set a target of half of that growth rate, allowing population of 0.7 per cent a year. That would be part of the solution to the housing problem,” he said.

The movement away from large cities might offer a little relief because it is easier for builders to respond to housing needs in smaller centres, but Dunning said that he doesn’t expect much change on the supply front in the next five years.

His analysis shows that Toronto had a deficit of 129,735 low-density homes — detached houses — in the period of 2006-2007 to 2019-2020. But it had a surplus of nearly 60,000 high-density homes (highrise apartments) and medium-density homes (townhouses).

If town homes absorbed some of the demand for detached housing, he calculated that Toronto still comes out with a shortfall of 104,570 homes to suit the demand. He based his demand figures on population and household formation for different age groups.

Because of slowed population growth during the pandemic but a normal rate of housing completions, there will likely be a surplus of homes in Canada this year.

But it will take moderated population growth and increased construction — from the average of about 78,000 lowrise houses to about 100,000 — “to produce a substantive and impactful reduction of the shortage that currently exists for low-density housing,” he wrote.

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Brian Brotherston
Qualified Associate Financial Planner
Watershed Financial Solutions
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