November 27, 2023
Current headline news bombards us with titles like: “housing shortage”, “unaffordable housing”, and “people die on the streets for lack of housing”. These housing-related issues have materialized since 2015; we did not have these topics at that time.
However, all of these headlines spawn questions. For example, what is affordable housing? One metric the Central Mortgage and Housing Corporation (CMHC, the Canadian mortgage insurance company) uses is that no more than forty percent of after-tax family income should be used for housing. But does this metric apply today?
The median family income in Ottawa is just over $100,000 today, and the average house price is slightly over $600,000. The minimum downpayment is five percent for the first half million dollars, ten percent for the next half million, which translates into $35,000 for the average house in Ottawa. So, with this downpayment one needs a mortgage of $565,000 that would cost today circa $4.000 per month. The annual cost, $48,000, would therefore be over forty percent of the annual income of the average Ottawa family income. Which means housing is, in fact, unaffordable, unless one has a larger downpayment to reduce the monthly mortgage payment.
One way to look at housing issues is to identify factors creating demand for, and supply of, housing. Either decreasing demand, increasing the supply of housing, or doing both, would alleviate the current housing problem.
The major factors on the demand side are immigration and the entry of foreign students. Canada let in 430,000 immigrants and 550,000 foreign students in 2022. All of the housing demand can be attributed to these two classes of newcomers to Canada: there are 424 housing units per 1000 people in Canada, so the close to one million newcomers alone needed 400,000 units in 2022 when Canada builds only 250,000 units per annum (Census and CMHC statistics).
While the last two classes of newcomers are beneficial to Canada, they create a huge stress on the housing markets. They are beneficial in that Canadian fertility rates are below replacement rate, hence the rationale for increased immigration. Similarly, Canada is short of skilled construction workers, and therefore welcomes immigrants with such skills. And foreign students pay two or three times the university fees Canadian students pay and therefore contribute to the universities’ bottom line. But we must balance our priorities and perhaps providing housing is more important today than other objectives.
Most of the supply issues can be attributed to the shortage of skilled workers and the lack of land for development. Land is especially a major issue in some of our large cities. Vancouver is surrounded by water and mountains. Toronto’s expansion is limited on one side by water.
Densification has become the key word today to accommodate the increasing population. Densification requires rezoning by municipalities, that takes years. And vacant land development, where available, also takes years for approval.
Are there any solutions? On the demand side, the federal government could reduce the flow of immigration and the intake of foreign students to alleviate demand and pressure on housing. And municipalities could accelerate the approval process to increase the supply of housing.
The two levels of government, working in tandem, could alleviate the housing problem. However, both initiatives would also create negative consequences; Canada needs skilled people and universities favor foreign students. And an acceleration of municipal approvals may weaken environmental reviews and public engagement – both important review elements in the development process and expected by Canadians.
The bottom line is that increased coordination between the different levels of government would go a long way to streamline the process of welcoming immigrants and foreign students entering Canada by making sure that housing is available.
The danger I see is that a panicky response today encouraging a hugely accelerated house construction program could result in an oversupply of housing in the next few years during which the federal government may change its priorities and reduce targets for immigration and the entry of foreign students.
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