Any builder knows that building a good home must start with a solid foundation. The same is true for good housing policy. Budget 2022 has been tagged as a housing budget, with emphasis on addressing what is frequently described as a housing crisis. The solution, however, lacks a foundation. It also erodes its own intent, as an urgent response to a crisis, by pushing its headline Housing Accelerator Fund spending plan two years down the road.
The budget builds its housing foundation on a tenuous frame – that “the biggest issue making [housing more expensive] is supply” (or lack of). It draws on a flawed comparison against G7 countries, establishing that Canada has the fewest homes per capita in the G7 and presents a nice chart establishing this fact.
But there is another chart, posted above, that is not included, nor presented in any of this discourse, a comparison of the average household size in each G7 country. This shows that except for the US, Canada has the highest number of persons in each house (2.47 vs average of 2.31). And based on this, Canada needs to produce 405 homes for every 1,000 in new population, fewer than the G7 average of 431. With the exception of 2017-19 we have substantially exceeded this level every year (average of 543 homes/1,000 since 2001).
The budget proposes, and the Finance Minister proudly exclaimed in presenting it, that to address this cause of housing affordability Canada will double the number of homes being built and “we will build 3.5 million homes by 2031”. This means, on average 350,000 homes per year, a substantial increase over the average of 187,000 in the decade from 2011-20.
An increase in housing construction will absolutely be needed to meet targets for immigration, as necessary to meet demands for the labour market. But is 3.5 million the right number, or even in the ball-park?
The Budget identifies an immigration target of 451,000 new permanent residents per year. Meanwhile natural growth in our population has averaged 95,000 persons per year since 2016, and is declining as baby boom deaths outpace new births (natural growth in 2020-21 was only 52,000 people). So that’s a total growth of under 550,000 people per year.
Looking at our average household size at 2.47 persons per home, if we maintain this size these 546,000 people will need 221,000 new homes, much lower than the asserted need of 350,000 per year. Even if we have smaller households, and drop to the G7 average size of 2.31 per home, we need to add only 236,000 new homes per year.
This represents an increase over the average levels of construction over the past decade, but is well below the 277,000 started in 2021 (of which 244,000 were in centres of 10,000 and above). Starts surged in 2021 to a record high of 277,000, a 45% increase over the average of the prior decade, but this clearly didn’t impact the price trajectory. New homes are coming onto the market at the highest average price and rent levels ever.
So it appears that municipalities have already accelerated their permit approvals; and builders have upped their game sufficiently to meet expected new demand. But with this high number of starts builders are selling these at higher prices that they anticipated when starting, worsening rather than correcting affordability. And today’s starts are initiated with expectations of some increase over current prices.
Calling for an increase to build 3.5 million homes (increase annual construction from 200,000 to 350,000 per year) the Housing Accelerator Fund proposes to incent construction of only 100,000 of these homes, less than 3% of the stated new requirement. And the expenditure tables in the Budget reveal that most of this money won’t flow until after 2024; only $150 million of the $4 billion to be expended by March 2023.
If we have a housing affordability crisis and an urgent need to expand construction, how will delaying spending money beyond two years from now actually help? Do we really need to spend $4 billion to fix an under-supply problem that appears to have already fixed itself?
The famous American cultural critic, H.L. Mencken, once said that, “For every complex problem there is an answer that is clear, simple, and wrong.” Such is the case for the under supply foundation in the federal budget.