Rebalancing Canada’s housing market will take a decade

Hi, I’m Tony Stillo, Director of Canada Economics at Oxford Economics. Today I’ll be discussing why we believe it will take another decade to build enough homes to restore affordability for housing across Canada. To balance the housing market, we estimate that 4.2 million new dwellings will need to be built between now and 2035.

This includes 2.9 million dwellings to satisfy growth in households, 700,000 new dwellings to make up for past shortfalls and ensure a normal vacancy rate, and around 600,000 new dwellings to remedy suppressed household formation due to unaffordability.

Housing starts will have to average around 300,000 units annually through 2035, and while this is historically high, it’s well within the nation’s home building capacity.

While it will take a long time to construct these new dwellings, we expect stronger growth in housing supply than in housing demand in the coming decade will mean house prices will rise more slowly than incomes.

So, housing affordability should improve progressively, with home ownership back within the reach of the typical household by 2035.

Our analysis also finds that CMHC’s aspirational target to build 3.5 million new houses by 2030, on top of those required for household formation, is not feasible and significantly overstates the actual number of new dwellings required to restore affordability.

Construction capacity constraints, worker shortages and other challenges make the requisite near tripling of the current pace of new home building almost impossible.

Moreover, we have key concerns regarding such a massive potential addition to Canada’s housing supply. It would result in approximately 1 in 5 dwellings being unoccupied, raising the risk of an oversupplied market and a prolonged slump in housing prices, especially as ageing baby boomers begin selling or bestowing their homes in the mid 2030s. Additionally, devoting too many resources to residential construction would likely crowd out business non-residential capital formation, hurting Canada’s long-term economic potential and productivity growth.