This month’s monthly newsletter consists of two components, Canada’s housing supply shortage and how developers are attempting to tackle that shortage, and my monthly market report.
Developer's are tackling Canada's Housing Supply Shortage
Canada’s housing supply fell short of demand even before COVID struck, a situation the pandemic brought into sharp relief. It’s not that home builders have been sitting idle. Housing starts over the past 12 months were the strongest since the mid-1970s, and the number of homes under construction is at an all-time high. The problem is that it takes time for new construction to reach the move-in stage. The average timeline has more than doubled over the past two decades, from 9 months to 21 months.
The construction boom is beginning to deliver more move-in-ready supply. Housing completions should accelerate in the coming year—provided supply chain disruptions in the construction industry don’t interfere too much with ongoing work. Yet the market impact will vary across the country. Smaller markets are seeing the bigger relative increase in housing starts, and will get more supply sooner. It will be a longer wait in some of Canada’s larger markets, where the pandemic construction boom has been more subdued and heavily concentrated in slower-to-build multi-unit dwellings. Big-city supply issues are likely to persist, especially as stronger immigration drives up housing demand in the coming years.
The pandemic triggered a sharp drop in interest rates, a huge buildup in household savings and changing housing needs that sent an unprecedented wave of Canadians scurrying to buy a home. The stampede siphoned off the stock of existing homes for sale and depleted newly built home inventories, especially for sought-after single-family and other low-rise homes. These, and sky-rocketing prices, proved unambiguous signals for builders—and municipal permit-issuing authorities—to get cracking and expand Canada’s housing stock. Their answer has been dramatic. In the past 12 months, builders across the country have poured the foundations (defining a housing start) for the highest number of housing units (260,500) than at any time since 1977. This represented a 26%, or 53,600-unit, increase relative to the 2015-2019 average pace (206,900 units)
There have never been so many units under construction in Canada.
The pile of new projects put more strain on builders’ already record workload. There are now close to 320,000 housing units under construction in Canada. This is by far the highest number, and a 12% (or more than 30,000-unit) increase from the end of 2019. About three-quarters of the total are apartments (mostly condos but also rental). All that construction activity has yet to significantly boost the move-in ready supply. It can take from six months to several years to complete a unit, depending on the type. Various pandemic-related disruptions and challenges no doubt lengthened the process. Still, completions are rising: builders have completed 215,000 new units in the past 12 months, up from an average of 193,000 units from 2015 to 2019. This continues to be short of the 220,000 average increase in the number of Canadian households in the four years preceding the pandemic.
The expectation is that completions will rise materially in the coming year as builders put the finishing touches on units started both before and during the pandemic. The sheer number of apartments under construction (with typically longer production timelines) should also support high completion counts beyond next year. While many factors can alter delivery schedules, we think as many as 240,000 housing units could be completed in 2022 nationwide—the biggest push in a generation to address supply issues. Stronger levels like this will need to be repeated in years to come to make up for under-building in the past decade and meet growing demand arising from record projected immigration. Relative to population, completions have stayed below their long-term average throughout the 2010s.
Canadians’ love affair with smaller towns’ lifestyle and relative affordability during the pandemic has sparked a construction boom unequaled among larger markets (all proportions considered). Rural and small urban areas recorded the strongest growth in housing starts in the past 12 months relative to the 2015-2019 period, rising 51% and 33%, respectively. Medium-size urban areas weren’t far behind with an increase of 27%. Not only that, the types of housing built are predominantly (70%) single-detached and other ground-oriented homes, which have usually shorter construction timelines. This means the builder response in smaller markets is not only significant size-wise but its impact on supply will be quicker than in larger metropolitan areas where apartments accounted for 62% of starts in the past 12 months. This isn’t to say big-city builders dragged their feet during the pandemic. They, too, poured many more foundations (housing starts climbed 23%). In fact, census metropolitan areas (CMAs) accounted for the bulk (38,000 units) of the overall increase in housing starts (57,000 units) from the 2015-2019 average. It’s just that the timeline toward completions will be longer for the most part.
Housing starts barely increased in the Toronto region in the past 12 months compared to the 2015-2019 average, rising just 1.4% or 500 units. The ramp-up in new construction was a little more vigorous in Edmonton (up 4.1%), Calgary (up 7.2%) and Vancouver (up 10.3%) but still well below the national average (26%). Relatively flat starts in the Toronto area in part reflect a significant drop in pre-construction condo sales in 2018 and 2019 following Ontario’s Fair Housing Plan in 2017. A recent spike in building-permit issuance suggests the pace could pick up. Failing that, the supply response will look underwhelming in the region—prolonging the significant challenges facing buyers and renters. Builders are working hard to address supply issues in Montreal and Ottawa.
Housing starts over the past 12 months were up 11,000 units (or 50%) from the 2015-2019 average in the Montreal area, and up 5,700 units (or 65%) in Ottawa-Gatineau. Purpose-built rental units accounted for more than 90% of the increase in Montreal.
Are the right kinds of units being built?
The sheer number of homes slated to come to market is one thing. But will they be the right ones to meet demand across the country?
Yes and no.
The new units for the most part have already found takers. Builders and developers most often start construction on projects only after they have firm sales agreements in hand. The market’s answer is therefore yes. At the same time, it’s unlikely the new supply will fill the huge housing gap for Canadians of modest means. High and rising construction costs pose tremendous challenges for builders to produce more affordable options, leaving many Canadians struggling to get on the housing ladder.
The pandemic has also thrown into question several prior housing preferences. Extended time spent at home prompted many Canadians to seek larger living spaces, and loosened attachment to live in core urban areas. While it’s unclear how permanent these changes will be, there’s a potential that unit size, configuration and location of recently started high-rise projects may fall out of favour. Apartments (both condos and purpose-built rental) not only accounted for most (55%) of the housing starts over the past 12 months, but also showed the biggest increase (39%) from the 2015-2019 average.
Slow supply responsiveness has been a central issue for Canada’s housing market for years. While we’re encouraged to see municipalities issuing more building permits and builders cranking up housing starts over the past 12 months, it still takes close to two years on average to build a home (ranging widely across housing types). This average construction length has more than doubled over the past two decades. The main reason is apartments (taking the longest to build) have come to represent a significantly larger share of homes built. Limited construction capacity has also been a factor in some parts of the country. And those timelines don’t even count the time (and resources) required to obtain the proper approvals and permits to get shovels in the ground.
Part of the solution to Canada’s housing market imbalance runs through the mix of new units being built: a recalibration toward project types that can deliver move-in-ready units more quickly to market—like low– or mid-rise housing—would boost supply responsiveness. Addressing the ‘missing middle’ (lack of medium-density housing) in some of Canada’s largest urban areas, for example, would be a significant step in that direction. This should be done in conjunction with a sharp focus on streamlining regulatory and project approval processes, and tackling skilled trade shortages and other constraints that limit production capacity.
Monthly Market Report
Home sale activity remains elevated across Metro Vancouver’s housing market while the pace of homes being listed for sale continues to follow long-term averages.
The Real Estate Board of Greater Vancouver (REBGV) reports that residential home sales in the region totalled 3,149 in September 2021, a 13.6 per cent decrease from the 3,643 sales recorded in September 2020, and a 0.1 per cent decrease from the 3,152 homes sold in August 2021.
Last month’s sales were 20.8 per cent above the 10-year September sales average.
There were 5,171 detached, attached and apartment properties newly listed for sale on the Multiple Listing Service® (MLS®) in Metro Vancouver in September 2021. This represents a 19.2 per cent decrease compared to the 6,402 homes listed in September 2020 and a 28.2 per cent increase compared to August 2021 when 4,032 homes were listed.
September’s new listings were 1.2 per cent below the 10-year average for the month.
The summer trend of above-average home sales and historically typical new listings activity continued in Metro Vancouver last month. Although this is keeping the overall supply of homes for sale low, we’re not seeing the same upward intensity on home prices today as we did in the spring. Home price trends will, however, vary depending on property type and neighborhood, so it’s important to take a hyperlocal look at your location and property category of choice before making a home buying or selling decision.
The total number of homes currently listed for sale on the MLS® system in Metro Vancouver is 9,236. This is a 29.5 per cent decrease compared to September 2020 (13,096), a 2.6 per cent increase compared to August 2021 (9,005) and is 27.7 per cent below the 10-year average for the month.
For all property types, the sales-to-active listings ratio for September 2021 is 34.1 per cent. By property type, the ratio is 25.5 per cent for detached homes, 53.1 per cent for townhomes, and 36.7 per cent for apartments.
Generally, analysts say downward pressure on home prices occurs when the ratio dips below 12 per cent for a sustained period, while home prices often experience upward pressure when it surpasses 20 per cent over several months.
The total inventory of homes for sale remains insufficient to meet the demand in today’s market. This scarcity limits peoples’ purchasing options and ultimately adds upward pressure on home prices. With the federal election now behind us, we hope to see governments at all levels work with the construction industry to streamline the creation of a more abundant and diverse supply of housing options.
The MLS® Home Price Index composite benchmark price for all residential properties in Metro Vancouver is currently $ 1,186,100. This represents a 13.8 per cent increase over September 2020 and a 0.8 per cent increase compared to August 2021.
Sales of detached homes in September 2021 reached 950, a 27.9 per cent decrease from the 1,317 detached sales recorded in September 2020. The benchmark price for a detached home is $1,828,200. This represents a 20.4 per cent increase from September 2020 and a 1.2 per cent increase compared to August 2021.
Sales of apartment homes reached 1,621 in September 2021, a 1.6 per cent increase compared to the 1,596 sales in September 2020. The benchmark price of an apartment home is $738,600. This represents an 8.4 per cent increase from September 2020 and a 0.5 per cent increase compared to August 2021.
Attached home sales in September 2021 totalled 578, a 20.8 per cent decrease compared to the 730 sales in September 2020. The benchmark price of an attached home is $963,800. This represents a 17.5 per cent increase from September 2020 and a 1.2 per cent increase compared to August 2021.
If you have any questions about anything you read in this month’s newsletter please reach out to me at any time. I am always happy to talk real estate or provide a more in-depth analysis of our local markets.