The latest federal budget proposed more than $10.1 billion over five years towards housing in Canada, from tax credits to a new home savings account. Yet, one expert points out that this spending will only bridge some of the gap between the pace of homebuilding and the annual amount of desperately-needed supply.
Jimmy Jean, Desjardins’ vice-president, chief economist and strategist, stated in a recent Weekly Commentary report that the federal government’s proposed budget measures would only close a portion of the country’s current housing shortage.
“Big picture? There’s a significant gap between the current pace of homebuilding and the supply that will be needed every year, but by our estimate, the budget measures would close less than 20 per cent of the annual gap, and only in the first few years of the projection period,” said Jean.
“Some of the remaining gap in the federal government’s plans could be filled by units promised in the 2017 National Housing Strategy, but the success of this initiative has been mixed,” he added.
Low interest rates, population growth and the rush to buy homes before prices and mortgage rates jumped higher have all contributed to the rise in real estate demand, Jean stated. Despite high levels of housing starts over the last few years, the pace of home supply hasn’t been able to keep up in Canada. While the Canadian Real Estate Association’s (CREA) MLS Home Price Index increased 15 per cent on average over the past two years, Desjardins’ Canadian Affordability Index dropped to its lowest level in almost 15 years, an indication of the widening difference between prices and income growth.
“So we were expecting to see a 2022 federal budget with a lot of strong measures to boost the housing supply,” said Jean. “What we found was a clearly stated problem: Canada will need to double its current pace of homebuilding to meet demand over the next decade.”
However, Jean pointed out that Desjardins couldn’t find a “very convincing strategy.” The 2022 budget includes plans for the Housing Accelerator Fund, which would build 100,000 net new housing units over the next five years. However, this would average out to just 20,000 units a year, Jean said. The budget also dedicated funding to thousands of co-op and vulnerable housing units, but support for these programs has already been included in prior initiatives.
In addition to the budget’s modest plans to boost housing supply, Desjardins’ chief economist said that the doubling of the First-Time Home Buyers’ Tax Credit and the introduction of the First Home Savings Account next year may create a bump up in demand. The government has banned foreign buyers from purchasing residential property for two years, but data indicates that non-residents make up a marginal role in the current housing market. While the anti-flipping tax was a positive step to discourage market speculation, Jean noted that it appears unclear how much extra home supply it will free up.
The aggressive tightening from the Bank of Canada should cool down demand for housing, said Jean. In its latest announcement, the BoC hiked its key lending rate 0.5 per cent up to one per cent, the largest increase in 22 years. However, the chief economist pointed out that “monetary policy can’t build homes.” Higher interest rates and a dearth of unfilled construction jobs will create headwinds.
“To be sure, measures taken in the budget to increase supply are a step in the right direction,” said Jean. “But given the importance of adequate housing supply to Canada’s economic outlook, we’ll have to pray for more decisive policy in the future.”
