How many houses does Canada actually need?

Depressing yet accurate need. Striking disconnect between immigration levels and housing availability and needs. Given housing constraints, becomes even harder to justify current and growing immigration levels and surprising that there is so little thinking and questioning regarding the linkage:

Everyone agrees Canada has a major housing shortage. To make homes more affordable for young people, to house incoming waves of immigrants and to restore sanity to markets like Toronto and Vancouver, the country needs more homes.

But exactly how many homes? That proves to be a trickier question than you may think.

Estimates vary hugely because the size of the country’s housing shortfall can be defined in a multitude of ways.

The simplest method is to look at what level of home construction would be required simply to meet new demand and stabilize the market at today’s lofty levels. Even by that conservative standard, Canada is falling short.

In recent years, it has typically completed about 200,000 new homes a year – standalone homes, condos and other types of dwellings. However, immigration and other factors will create about 240,000 new households a year between now and 2024, according to RBC Economics. This suggests that construction needs to quickly rise to levels roughly 20 per cent higher than in recent years simply to give all those new households a place to live.

Yet it only begins to address Canada’s structural shortfall of housing. “Even if we had 240,000 completions a year for the next few years, we would simply be meeting new demand, not reducing the gap that has already built up,” Robert Hogue, assistant chief economist at Royal Bank of Canada, said in an interview.

If you look at what would be needed not just to keep pace with new demand but to address the accumulated shortfall that has accumulated over many years, the numbers swell to truly frightening proportions.

Restoring Canada’s housing affordability by 2030 to the levels that prevailed around 2003 would require an immediate doubling or more of home construction rates, according to a recent study by Canada Mortgage and Housing Corp. In an ideal world, Canada would be completing an unprecedented 400,000 or more new homes a year, according to CMHC’s numbers.

A bit of historical context about Canadian housing trends may help to put this flurry of estimates into perspective.

Last year, construction soared and 272,000 new homes were started across Canada. Economists and housing analysts applauded this achievement since it was the country’s highest annual number of starts since the heyday of the 1970s.

Unfortunately, the figure was not quite as impressive as it appeared at first glance. Canada’s population is now much larger than it was a half-century ago – more than 38 million people compared with only about 23 million in 1975.

If you adjust last year’s housing starts for the vastly increased size of the Canadian population, the big jump in housing construction last year took Canada to only about 60 per cent of the rate of housing starts per capita that it was achieving in the mid 1970s.

And even that comparison doesn’t capture the extent of the shortfall because the average size of households has been steadily shrinking – the result of people marrying later, having fewer children and living longer.

In the early 1940s, the average Canadian household had 4.3 people, according to RBC Economics. By 1981 that had fallen to just under three people. Today it stands at 2.4 people.

This has resulted in a tremendous upward push in the need for housing. To house the three-person households that were common in the 1970s, you would have required roughly 33 homes for 100 people. In contrast, to accommodate the same 100 people today, in households that average only 2.4 people each, you would need more than 41 homes – a major increase even if Canada’s population hadn’t budged at all.

Most analysts agree the combination of shrinking households and years of sluggish construction has resulted in a serious housing deficit – but putting a hard number on the size of that deficit is difficult.

Last year, Jean-François Perrault, chief economist at Bank of Nova Scotia, wrote a noteexploring a couple of methods for estimating the size of Canada’s housing shortfall. Just to be clear: This is the size of the shortfall that would still exist even if Canada were to suddenly speed up construction to the point it was meeting demand from newly formed households.

His first approach was to look at what it would take to keep the ratio of housing units to population stable since 2016, when home prices began a notable upward surge. This method suggests Canada was about 100,000 dwellings short at the time Mr. Perrault wrote his report in early 2021.

However, it ignores the shortfall that had accumulated before 2016. A more wide-ranging approach is to compare Canada with other advanced economies in the Group of Seven and ask what it would take for Canada to achieve the same number of housing units per 1,000 residents as other G7 countries.

To catch up to the United States – a country experiencing housing shortages of its own – Canada would require another 99,000 units, Mr. Perrault estimated in his note. To catch up to the United Kingdom, 250,000 homes. To catch up to the G7 average, a staggering 1.8 million homes.

People can argue which number is most appropriate, Mr. Perrault said in an interview, but “we know there is currently a huge gap and that gap will rise given population growth and recent construction trends.”

One disturbing aspect of those recent construction trends is the discrepancy between housing starts and housing completions. While housing starts have been lacklustre, housing completions have been even worse.

Between the start of 2016 and the end of 2021, Canada started an average of 221,000 homes a year but completed only about 200,000 homes annually. The discrepancy appears to reflect a variety of factors – labour shortages, rising raw material costs and the long lag time between starting a multiunit project and completing it – but whatever the exact cause of the gap, it does drive a wedge between widely reported numbers on housing starts and the actual amount of housing that is being delivered.

Meanwhile, Ottawa has supersized national immigration targets, raising them from around 260,000 people in 2015 to more than 400,000 today. Thanks largely to immigration, Canada’s population is now growing at more than twice the pace of most developed economies, according to Mr. Hogue at RBC.

Given immigration pressures, demographic trends toward smaller home sizes and Canada’s long history of sluggish construction, how many new homes would it take to make housing affordable again? CMHC economists took a crack at answering that question in an ambitious study over the summer.

They defined housing affordability in two ways. The first was as the level of affordability that prevailed in each province in 2003-04. The second was as the level that would require households to devote no more than 40 per cent of their after-tax income to housing.

If nothing else, these definitions help to put a number on the extent of Canada’s affordability challenge.

In Ontario, achieving affordability would mean the average price of a home would have to fall from $871,000 in 2021 to between $499,000 and $551,000 in 2030, depending on which affordability benchmark you use. In British Columbia, restoring affordability would require average prices to fall from $929,000 in 2021 to between $607,000 and $679,000 in 2030.

In contrast, home prices in other provinces already seem to be affordable or at least close to affordable, especially when judged against the common 40-per-cent-of-disposable-income benchmark.

But even taking those more affordable regions into account, bringing the country as a whole back to affordability is a mammoth challenge because of the huge shortfalls in Ontario and British Columbia.

The CMHC study estimates that Canada must build an additional 2.3 million homes between now and 2030, on top of what it is already building, to meet the 40-per-cent-of-income target. Achieving the more ambitious target of restoring the affordability levels of 2003-04 would demand 3.5 million more homes than the business-as-usual scenario.

The bottom line? Canada needs to at least double its current pace of home building to have a serious impact on affordability, according to Aled ab Iorwerth, deputy chief economist at CMHC.

“We need a lot more supply, we need a sea change,” he said.

Source: How many houses does Canada actually need?