Why Ottawa’s plan to ramp up construction may not bring home prices down

The federal government’s huge gamble on new construction is unlikely to have much effect on soaring home prices, some economists and housing experts warn.

The strategy to massively accelerate the construction of new homes across Canada is the centerpiece of the Liberal government’s updated housing strategy, which was itself central to the 2022 budget.

The spending plan includes $4 billion to create a Housing Acceleration Fund, an ongoing program to help city governments accelerate new housing projects.

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Ottawa says the fund will help build the 3.5 million new homes Canada needs over the next 10 years.

“The solution to housing affordability is housing supply,” Housing Minister Ahmed Hussen told the House of Commons earlier this week.

But some observers say this approach is based on misinterpreted data and the tendency of politicians to oversimplify complex issues.

No evidence that more homes mean lower prices: expert

“[The government] seems to have accepted the proposition that any offer is good, and if we flood the market with an offer that will drive prices down,” said Steve Pomeroy, researcher at the Canadian Housing Evidence Collaborative at McMaster University.

“I don’t think there’s any evidence that this will actually happen,” said Pomeroy, who described the undersupply argument as a “myth.”

Christine Whitehead, emeritus professor at the London School of Economics, said the identification of undersupply as the cause of high prices was “absolutely consistent” among governments around the world.

“The honest answer to the affordability crisis is much more about macroeconomics,” said Christine Whitehead, emeritus professor of housing economics at the London School of Economics. (UK Collaborative Center for Evidence of Accommodation)

Whitehead – who said he has studied housing economics for “many decades” – said a narrow focus on accelerating new construction makes an attractive policy pitch but rarely drives prices down.

“Most normal people would think a lot more housing would make things better,” she told CBC News.

“Just building 100,000 houses a year or 200,000 houses a year won’t make a big difference, by itself, to house prices.”

Pierre Poilievre has made housing affordability a central theme of his Conservative leadership campaign. He also identified a lack of supply as the main culprit for the price hike.

The NDP has called for new housing to be built, with the caveat that newly built homes should be reserved for low-income families.

How many houses does Canada need?

The federal government, opposition parties and many economists have argued in recent years that Canada does not have enough housing for its people.

A 2021 Scotiabank Item reported that Canada has the fewest houses per 1,000 people of any G7 country, which the bank described as a “structural housing shortage.”

Budget 2022 includes a similar analysis that shows Canada falls below the OECD average for housing per 1,000 people – behind France, Japan and Germany, but ahead of Australia and China. New Zealand.

Pomeroy said statistics like these do not adequately support the government’s undersupply argument because other important factors are left out, such as Canada having the second-largest size of average G7 household.

He said the recent pace of new housing starts in Canada has kept pace with population growth – even as house prices hit new highs.

“When you look at the data, it doesn’t support this idea that we have a lack of supply, certainly at the aggregate national level,” Pomeroy said.

Canada added more than 271,000 new homes in 2021, according to Data from Canada Mortgage and Housing Corporation.

Housing and Diversity and Inclusion Minister Ahmed Hussen has repeatedly said that a lack of supply is at the root of Canada’s housing affordability crisis. (Adrian Wyld/The Canadian Press)

Robert Kavcic, senior economist at the Bank of Montreal, also questioned the government’s ability to further stimulate construction.

“The challenge here is that we are already seeing record numbers of units under construction, and the industry is dealing with labor and capacity constraints,” he wrote in a response to the budget.

Kavcic also noted that if the government succeeds in accelerating new construction, it could backfire by driving up material costs and worsening inflation, pushing up house prices.

Ottawa says other factors contribute to high prices

In an email to CBC News, a spokesperson for Hussen qualified the government’s argument that undersupply drove up prices.

“There are a number of factors that make housing more expensive, but the biggest issue is supply,” wrote Daniele Medlej.

“However, we recognize that there are other elements at play, which is why we are putting in place several measures to combat unfair practices in the housing market, including banning foreign buyers, introducing an anti-reversal tax and the ban on blind auctions.

Whitehead said government efforts to stimulate new supply and change regulations are overshadowed by forces in the macro economy, such as income levels and interest rates.

Unless it institutes politically toxic measures such as capital gains or inheritance taxes, she said, the Canadian government will have little direct control over prices.

“I wish I could be happier about it,” Whitehead said. “What I’m saying is there’s nothing wrong with building houses. You should keep building houses and try to allocate them to people in need.”

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