Ontario’s plan to build 1.5 million homes not possible after spike in demand: BMO
A leading skeptic of Ontario’s ambitious housing plan has emerged – Canada’s oldest bank. The province’s housing affordability task force has released a plan to build 1.5 million homes over 10 years. BMO Senior Economist Robert Kavcic threw a bucket of cold water on the plan. Not only is the bank saying it doesn’t make sense, but it’s implying that it looks like Ontario’s last real estate bubble.
Ontario promises to build 1.5 million homes within 10 years
Ontario’s new housing affordability plan promises tons of supply. They plan to facilitate the creation of 1.5 million new homes over the next decade. The strategy involves various provincial interventions, including the cancellation of municipal planning to densify cities. “The highly publicized Task Force on Housing Affordability in Ontario has recommended that 1.5 million homes be built in Ontario over the next decade. Of course they did,” Kavcic wrote.
The plan doesn’t make sense, likely to make matters worse
The plan doesn’t even pretend to be feasible, which becomes obvious if you understand the scale. “First, it’s about double the (already high) completion rate in Ontario, per year,” he says.
Ontario is delivering new homes at one of the fastest rates ever. The province saw 76,114 new homes completed and delivered in 2021, up 14.64% from the previous year. This was the highest level of completion since 2004, with only two more years higher in the last 3 decades. The two years were catching up with a previous real estate crash and clearing a backlog. This provided a temporary boost.
This was the highest completion level since 2004, and only two other years in the last 30 years have seen more completions. These two years were catch-up years after the previous housing construction boom and bust, providing temporary boosts.
“To put it simply, there is virtually no chance of finding available labour, let alone skilled trades, to meet such an increase in demand. Especially in a tight labor market,” he says.
High completions are occurring in one of the tightest labor and materials markets ever. Builders have seen excess demand for materials add an average of $65,000 per home. Labor costs have also increased by 20% over the past two years, driven by excess demand. It won’t exactly reduce the cost of housing within a reasonable time frame. More likely, it drives up the cost of housing in the short term.
BMO suggests this looks like Canada’s last housing bubble
BMO hints at a disastrous long-term setup, which looks like previous bubble promises. “Secondly, most of this supply will come to an end once demand picks up and the millennial-led population boom peaks, saturating the market for a long, long time. We’ve even seen this before. show in Ontario…”
The demand for immigrants could be a solution to absorb the supply, but it is now problematic. The OECD predicts that Canada will be the worst performing advanced economy over the next decade. In fact, predictions show it to be one of the worst performers of the next 40 years, but it’s out of reach. It is easy to say that the problems are temporary for 4 or 5 years. It becomes much harder to convince people that it’s temporary a decade later.
In addition to slow economic growth, Canada will face competition for immigrants. Immigrants to Canada come largely from economies that are predicted to be more advanced by 2030. High debt, low business investment and high housing costs may not be what they are today.
Even if housing construction at this rate were possible, the costs would be inflationary. It turns out that when an economy is betting on housing, doubling down on compression isn’t the best option. This is precisely part of the limiting factor that should hold back Canada’s opportunities.
BMO has been (and is!) a strong proponent of supply, but said Canada’s latest problem is excess demand. The bank’s estimate shows that the excess demand created by the Bank of Canada’s (BoC) policy missteps is about 6% of GDP. They have previously said that the share of investor demand indicates that capital is not matched to demand, suggesting that the only real solution is higher rates.