Millions of houses needed by any measure
Governments and housing experts are calling for a lot more housing construction in an effort to stop rapid price escalation over the decade or so, but no one seems to agree on how much is needed to restore balance in the housing markets.
Restoring equilibrium in housing markets could mean different things to different stakeholders. Hence, the estimates of new housing to be built above and beyond the business-as-usual scenario can also vary widely.
A housing market in equilibrium should at least imply moderate price fluctuations, and that any price increase is in step with changes in median household incomes. This means sufficient new and pre-existing homes are available to meet demand when borrowing conditions are neither lax nor tight. Such a balancing act is hard to achieve.
An alternative view of a balanced housing market can be based on demographics. For example, one can look at the rate of new household formation, also known as the headship rate, to see if housing construction is keeping pace with new demand. Such consideration could be devoid of any concern for housing prices, which may still rise or decline while housing construction rates appear in line with new household formation.
A backdoor connection between headship rates and housing prices also needs our attention. The headship rate may drop if younger adults stay with their parents longer when housing becomes increasingly out-ofreach for younger cohorts. As a result, housing construction might erroneously appear to be in line with new household formation, ignoring that the headship rate is lower than it should be.
A recent report by the Smart Prosperity Institute (SPI) relied on demographics to estimate that Ontario must build an additional 1.5 million new dwellings to meet the demand generated by new households and to make up for the previously unmet demand.
If you think that number is large, Canada Mortgage and Housing Corp.’s estimated the need for an additional two million dwellings in Ontario over the next decade to meet housing shortages.
Surprisingly, the demographic-based detailed analysis by SPI is almost identical to the 1.5 million homebuilding target established earlier by Ontario’s Housing Affordability Task Force. Whereas the task force did not reveal the details about its methods, the SPI report offers a detailed explanation of its assessment.
The SPI breaks down the supply statistics into 1.03 million net (accounting for demolitions and conversions) new homes needed by 2031 to match population growth and another 471,000 dwellings to address the existing housing shortage. The suburban Peel region reported the largest number of homes needed at 277,000, exceeding the number required for the City of Toronto.
The SPI report used the average age-adjusted headship rates from 2016 for places in Canada, excluding Ontario and British Columbia (the two provinces with extreme house price increases), to determine the number of suppressed households or existing housing shortages. The future demand for housing is based on the government’s demographic projections.
The recent collapse in housing sales and noticeable decline in prices suggest that prices can fluctuate irrespective of the rate of housing construction. The recent increase in the cost of borrowing made monthly mortgage payments prohibitive for those seeking new mortgage loans. This has resulted in a provisional decline in housing demand.
The Canadian Real Estate Association reported that the sales-to-listing ratio, a proxy for supply and demand, declined to 52 per cent in June from a high of 85 per cent in January.
Long-term housing price trends depend more on the balance between demand and supply than on the shortterm fluctuations brought about by changes in interest rates and other limited impact interventions. Therefore, public-sector planners must not lose focus on building more housing since the housing deficit has already ballooned to millions.
Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-moranis Bulletin website, www.hmbulletin.com