HOMEBUILDERS HAVE PROVED RESILIENT, BUT MORE HOUSING NEEDED.
FP3
Despite supply-chain disruptions and restrictions on mobility and assembly, Canadian homebuilders continued constructing new homes as demand suddenly climbed during the pandemic.
A new report by the Canadian Home Builders’ Association (CHBA) highlighted the resilience of residential construction in 2020, with activity resuming in May that year once the sector was declared an essential service.
The homebuilding and renovation sector contributed to the economy while many other industries faltered because of pandemic-related restrictions. The residential construction sector in 2020 supported 1.24 million on- and off-site jobs, providing $81 billion in wages.
The focus in residential construction is usually on new home construction, but most jobs (58 per cent) are in renovation, while 42 per cent are associated with new home construction.
The report also describes how labour and material shortages contributed to construction delays and increased the price of newly built homes.
A survey by CHBA revealed that 21 per cent of builders faced challenges in recruiting staff, and construction and renovation companies were hit hard by supply chain disruptions. The unexpected rise in lumber prices contributed to an average increase of $19,254 in the construction cost of a dwelling, but a CHBA survey found that more than one in three builders experienced a rise of over $20,000 per unit.
Almost 60 per cent of the builders reported significant delays in project delivery due to supply chain disruptions, with the average delay being six weeks. Of note, builders in Ontario reported above-average delays in project completions.
In addition to lumber, builders struggled to source appliances, plumbing equipment and fixtures, doors and windows. As a result, construction delays contributed to a mismatch between housing demand and supply, further adding to housing price appreciation.
The rapid increase in housing prices is likely to have motivated an acceleration in housing construction. Still, residential construction activity, once normalized by the underlying population, is far less than the highs it reached in the early 1970s.
Assuming that regulatory and financial frameworks support new housing developments and that labour and material supply are sufficient, builders should escalate their production to benefit from higher housing prices.
The pandemic contributed to a steep increase in demand for low-rise dwellings. White-collar workers shifted to working from home and raised the demand for larger-sized residences. The CHBA found that the construction of single-detached and row housing increased by 130 and 104 per cent, respectively, between January 2020 and May 2021.
The CHBA report also documents 275,916 seasonally adjusted starts at annual rates in May 2021, a 41-percent year-over-year increase, which sounds strong, but the homebuilding sector is poorly understood and inadequately researched in Canada.
Most academic research in housing is primarily focused on the demand side. Regrettably, the supply side of the housing equation has not attracted as much scholarship as the demand side did.
Furthermore, homebuilders are often described in pejorative terms in the literature, increasingly seen as the purveyors of urban sprawl and not necessarily as ones providing opportunities for shelter.
At the same time, Canada has its fair share of supply skeptics who believe that enough housing has been built in the past, so increasing supply is neither warranted nor likely to impact housing prices.
But has Canada really built enough new housing in the past five decades? One way of answering this question is to see how much housing has been annually built relative to the population.
The resulting statistics are sobering. From almost 12,000 housing starts per million people in the early 1970s, housing construction has declined to about 6,000 starts per million people in the recent past. What’s more, current construction activity has been concentrated in highrise housing that meets the shelter needs of smaller-sized households, leaving families to compete for shelter in increasingly scarce lowrise housing.
Housing affordability for first-time homebuyers has worsened in Canada, since they can’t invest the equity from an existing dwelling to buy a home. In addition, ultra-low interest rates enable monthly mortgage payments to service more significant debt amounts, which has contributed to the fast escalation in housing prices.
If mortgage rates stay at historically low levels, housing prices will likely remain inflated. A severe dent in housing prices requires a significant increase in new housing construction. Assuming that the laws of supply and demand do not apply to housing is unlikely to improve housing affordability in Canada.