The Bank of Canada’s interest rates continue to increase while simultaneously, fewer new houses are being built. A new report published by the Canadian Centre for Policy Alternatives revealed that less homes are being built now than during the lowest point of the pandemic.
The report claims the high cost of materials due to inflation has brought home building to a near halt, predicting the market will continue to slow down as mortgage rates remain high.
In July, investment in new single family homes dropped by 21% when compared to April 2020, which was the lowest point in the pandemic for building. New row homes fell by 8% when compared to April 2020 as well as new apartments and condos by 2%.
When compared to February of 2022, just prior to the rate hikes taking place, the report says the situation was even worse.
Investment for single-family homes dropped by 36%, semi-detached houses were not far behind with a decline of 27% and new apartments and condos dropped by 109%.
“The Bank of Canada estimates that the worst impacts of rate increases take two years to hit the housing sector and the housing sector is the main vehicle for rate hikes to hit the economy,” said David Macdonald, senior economist and report author. “Right now, it has been 18 months since the first rate increases, but most of the bigger rate increases have occurred in the past 12 months — so the worst is yet to come.”
MacDonald said it takes between five to 10 years for the initial planning phase when it comes to new buildings coming to market, meaning the real shortfall for the housing crisis is still yet to come.
This will have serious “real life” consequences, he added..
“Often, we talk about rate hikes in a theoretical sense, but we’re seeing the real impact starting to hit the market where real estate feels it the most acutely,” said MacDonald.
The Bank of Canada lowered the overnight lending rate to 0.25% amid the first lockdown to allow people the ability to borrow money at a cheaper rate, so builders and developers saw an opportunity to make big returns once the economy reopened and took on projects.
However, now that the overnight lending rate has increased to 5%, developers do not see profit at the end of the tunnel for new projects. Developers are especially concerned with the fact that many people who bought pre-construction homes are now no longer able to afford the mortgage on the home once it becomes available.
In January, sales on new construction homes in the GTA plummeted to a 23-year low due to immense uncertainty in the market.
“(Developers are) no longer seeing that these projects will be a good investment for them, especially with the additional high cost of materials and labour,” said MacDonald. “That’s why we need less reliance from the private sector.”
MacDonald suggests the non-profit housing providers and post-secondary institutions could buy up already existing for-profit apartments and then retrofit them into non-market buildings with lower rent.
He would also like to see governments outlaw short-term rental platforms like Airbnb in larger cities.
McDonald said that municipalities could make changes to their zoning laws to accommodate room for new builds as well as reinstate rent control.
“The Bank of Canada wants to slow down the economy and slowing down residential construction is one way to do that,” he said. “We need more housing, but the bank is slamming that door shut.”
