Canada building fewer homes than during pandemic shutdown: report

Despite the country’s astronomical need for housing, Canada is building fewer homes today than during the pandemic shutdown in April 2020 and still, the worst is yet to come, a recent study says.

The Bank of Canada’s multi-year campaign of raising interest rates to combat inflation has had a devastating effect on the housing market, according to the report from the Canadian Centre for Policy Alternatives (CCPA).

“The impact of Bank of Canada rate hikes have been breathtaking,” David Macdonald — the author behind the report — writes.

The impact of interest rate hikes

Macdonald compares the current situation to the start of the pandemic: new single-family homes have seen a decline of 21 per cent, new row homes are down by eight per cent, and new apartment construction has dropped by two per cent. Even when compared to February 2022, when the rate hikes began, the numbers are alarming, with investment in single-family homes down by 36 per cent.

The central bank anticipates the most severe impacts of rate increases to be felt in the housing sector, and these effects may not be fully realized for up to two years. Macdonald says, “That was not an unfortunate side-effect — it was the central bank’s core plan.

“Right now, it has been 18 months since the first rate increases, but most of the bigger rate increases have occurred in the past 12 months—so the worst is yet to come.”
The overnight rate is now five per cent, and bank officials say, if needed, they’re prepared to raise it further.

“It’s as if governments are bringing a nail to the construction site, but the Bank of Canada is bringing a wrecking ball.”

– David Macdonald, CCPA

Higher interest rates disproportionately affect sectors connected to housing, such as construction, renovations, and homeownership transfers, due to the need for substantial loans in these activities. Businesses in the housing construction industry, for example, take on large debts for their projects.

Macdonald highlights a shift in the world of private residential construction. Nowadays, builders are unsure whether they can successfully sell newly constructed units. Adding to their concerns, the expenses accrued during construction are chipping away at their profit margins.

The government, at various levels, has been actively trying to address this crisis through initiatives like the Housing Accelerator Fund and other incentives aimed at boosting private-sector construction. “These private sector incentives may have been effective in 2019, but their relevance is rapidly receding.

“It’s as if governments are bringing a nail to the construction site, but the Bank of Canada is bringing a wrecking ball,” Macdonald analogizes.

A shift in focus

In the CCPA report, Macdonald suggests a shift in government focus. Instead of relying solely on the private sector, governments should consider more direct involvement in the housing market.

“This isn’t a time for more private incentives— it’s time to get your hands dirty,” he writes.

A way forward, according to Macdonald, could include:

• Initiatives like directly building non-market housing.
• Offering zero per cent mortgages to non-profit providers.
• Converting existing for-profit apartments into non-market buildings with lower rent.

Additionally, governments can enforce rent controls, implement transfer taxes on investment properties, and impose mortgage restrictions for investors.

Macdonald ends with a call to action: “Governments at all levels have been shouting about the housing crisis and the need to build new housing supply, but their solutions are stuck in an era when the private sector was actually building homes…It’s time for governments to take direct and ambitious action in the housing sector—to get back into the housing game, and stop relying on the private sector.”