Sunday, January 19, 2025 / by Teresa Pileggi
Canada's Housing Crisis: Possible Solutions to The Ongoing Housing Shortage
Canada's Housing Crisis: Possible Solutions to The Ongoing Housing Shortage
The housing shortage has become undeniably evident in Canada. Rising home prices and rents, interest rates, and home maintenance costs shatter the dreams of many would-be homebuyers. The gap between supply and demand also expands yearly, indicating an unending housing crisis, especially in major cities.
How can the country solve this housing puzzle and ensure affordable homes for all Canadians? Is it through regulating immigration or lowering home prices? The imbalance between supply and demand for homes is the primary cause of the crisis. Here is how Canada can solve the ongoing housing shortage.
Canada's Housing Plan
The housing crisis has been a trending topic for many years, although it worsened during the pandemic. A significant percentage of Canadians cannot afford a home due to high construction costs and increasing rents. Construction projects are also taking long to complete, delaying the hopes of many would-be homeowners. To mitigate the challenges, the Prime Minister, Deputy Prime Minister, and the Minister of Housing, Infrastructure, and Communities unveiled the federal housing plan, aiming to encourage the construction of millions of new homes.
Solving the housing crisis: Canada's Housing Plan, released on April 12, 2024, is the federal government's ambitious commitment to fill the gap between home demand and supply. The plan is built on the crucial federal investments launched in 2017 and is supported by Budget 2024 to make housing affordable by constructing new homes.
To achieve its mission, the plan outlines three areas that can help solve the crisis:
- Building more homes by lowering construction costs, getting more cities to allow home construction, transforming home construction practices, and increasing the labor supply.
- Making it more accessible to rent or own a home and ensuring every renter or homeowner can retain their home.
- Helping Canadians who cannot afford a home by building more affordable houses for students and seniors.
The RBC Economics and Thoughtful Leadership Report
According to the recent RBC Economics and Thoughtful Leadership report (April 8, 2024), if the situation remains, one million to 1.9 million new households will not be able to afford a home by 2030. Moreover, over 40% of those households will not earn enough to afford the increasing market rents. No change means the increasing home affordability tension will continue to impact Canada's global reputation. Several factors led to the housing crisis, including historic policy responses, structural shifts, irrational buying and selling, and inflation.
However, according to the report, the crisis developed in five phases:
- The demand for homes outgrew housing stock in the late 2010's. Canada's housing system started experiencing tension even before the pandemic as more people struggled to enter the market.
- Canadians changed their housing preferences at the onset of the pandemic. A drop in mortgage rates, more government support, and increased household income increased home demand. Home constructors experienced higher tension as the supply could not match the demand.
- Competition for available supply as more buyers entered the market led to irritational buying and selling. For instance, pre-construction sales spiked in 2021, with the Greater Toronto Area recording a soaring 25%. Lengthy and costly project approval, restrictive zoning, fast-rising building costs, and labor shortage also slowed home supply.
- The border reopening in mid-2021 welcomed more immigrants, increasing housing demand, especially in the rental market. The increasing demand pushed home prices up by over 50% in early 2022, posing a serious challenge to would-be homeowners.
- Interest rates and mortgage payments were hiked by 2022 as the Bank of Canada tried to tame post-pandemic inflation. Prices fell in most markets due to a drop in resale activities (almost 40% annually). However, they rose dramatically again due to a rise in construction costs that undermined the economics of most construction projects.
How to Solve the Housing Shortage Crisis
Solving the ongoing housing shortage crisis requires combined efforts from all real estate stakeholders. Luckily, with housing plans and budget recommendations in place, the journey to affordable and adequate housing can be shorter than what is estimated. The government and key players can solve the housing shortage issue in three ways.
1) Incentivize Mass New Home Construction
As the population increases, the demand for homes in Canada, especially in urban areas, also rises. As a result, the housing market experiences supply tension as more affordable homes are needed to catch up with the demand. The increasing demand and supply shortage also lead to skyrocketing prices, making it challenging for aspiring homebuyers to afford homes.
The federal and provincial governments must incentivize mass new home construction to address the supply shortage. Some ways the governments can encourage the construction of more homes include:
- Offer tax breaks and financial support to developers who build a certain number of affordable units.
- Provide grants or low-interest loans to individuals who want to build new homes.
- Enabling cumbersome rules, speeding up conflict resolution, and implementing helpful artificial intelligence tools can speed up the project approval process.
- Lower the cost of building new homes using cost-efficient materials and regulating government charges.
2) Address The Immigration Challenges
Canada has the highest rate of immigrants per population in the world, with its current annual immigration amounting to almost 500,000. The increasing immigration, particularly the influx of international students, has contributed significantly to the rising housing shortage. Therefore, while immigration can positively impact the country's economic and cultural aspects, regulating it can also help address the housing crisis.
3) Ease Zoning Restrictions to Encourage Productive Use of Land
Local governments must loosen charges and limitations associated with municipal zoning laws, permits, and regulations. These charges are usually high for new home developers and are often passed on to consumers through property prices and taxes. Some zoning laws also represent an inefficient use of land, leading to a shortage in the home supply.
The federal and local governments can encourage the use of land and the construction of more homes by easing zoning laws in the following ways:
- Modernize zoning regulations that stifled the development of mid-rise and rental housing (missing middle) in major cities. This will increase the permitted density and encourage the construction of more housing options such as rentals, small condos, and townhouses.
- Loosen restrictions against converting commercial properties to mixed-use houses. Local governments can expand the residential sector by encouraging the use of underutilized commercial properties. This will create mixed-use communities with numerous advantages, such as proximity to affordable amenities.
- Wave municipal development charges on projects estimated to remain affordable for at least 40 years.
The Bottom Line
Addressing Canada's ongoing housing crisis can take time and ambitious efforts from governments and real estate investors. That means all parties need a well-defined plan and implementation strategy to experience an affordable housing market again. Fortunately, some mitigation ways listed above are already in action, with provinces like Ontario and British Columbia loosening regulatory burdens to encourage mixed-use communities. Moreover, the federal government has various plans, such as the National Housing Strategy and Housing Accelerator Fund, to accelerate the affordable housing initiative.