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A worker outside of a house in the process of being built
Analysis
Canada

Does Canada’s new housing plan live up to the hype?

From the risk of triggering inflation to doubling down on supporting first-time homeowners, the plan raises questions

With real estate prices tripling since 2005 and rents increasing 20 per cent since the pandemic, housing is one of the biggest concerns across Canada. The federal government released a substantial housing plan along with the budget that is ambitious — very ambitious. It aims to double current construction levels.  

In some ways, the plan raises more questions than answers, including whether it will actually be a game changer for housing in Canada.   

To what extent can we increase construction without triggering inflation? 

At the height of the pandemic, when money was flowing into construction and real estate, we managed a historic, but short-lived, 25-per-cent increase in the number of housing units being built – which is a far cry from the targeted 100-per-cent increase. 

This came at a cost: prices for residential construction increased three times faster than inflation. The amount invested during the pandemic was high, but not unheard of when compared to the 1970s and 1980s. This points to a lower threshold for additional investment before it translates into inflation compared to prior years.  

Additionally, there are spillover considerations for non-residential construction competing for resources. Price pressures in the latter can drive prices in the former, as can be seen during the recent residential boom when non-residential construction prices doubled inflation. Ideally, we want to avoid significant increases in the cost of building and renovating infrastructure (hospitals, schools, office buildings, etc.).  

I do appreciate the incentive-based interventions (GST removal and the accelerated capital cost allowance for purpose-built rentals) rather than investing heavily in construction for this very reason.

Flipping the script on integrating immigrants in the construction industry 

Promoting trades via immigration is a smart move. Immigrants have been significantly underrepresented in the construction industry, comprising six per cent of the overall workforce compared to nine per cent for non-immigrants. With similar representation, we would have nearly 200,000 additional construction workers — equivalent to a bump of 13 per cent for the industry.  

We are still under-employing highly educated immigrants when we could be focusing on trades workers and immigrants with construction experience. Improving construction capacities will be essential to meet the ambitious housing plan targets and immigration could limit the inflationary impact of large-scale homebuilding.

Mobility issues are on the rise  

The rising cost of housing and lack of availability has led to slowing activities in the real estate market: housing resales are low and rental turnover rate keeps going down. The housing situation is now impacting labour mobility within the country. It seems counterintuitive, but the effect of maximizing immigration in Canada has been reduced mobility within the country.  

If workers are unable to move in order to follow higher-paying jobs, the country itself ends up losing. The higher-paid job is generally indicative of a higher contribution to the economy and the worker will contribute more fiscally. When we think about it, that is how cities have developed and labour mobility remains important to this day.

 

Is it wise to double down on support for first-time homeowners?   

While supporting first-time homebuyers is popular, I remain unconvinced that contributing to housing demand with more tax-free money is a winning proposition.  

The announced increase in the Home Buyer Planand the First Home Savings Account (FHSA) have brought the potential tax-free down payment for a couple from $70,000 to a whopping $200,000, not exactly middle-class savings. As I stated in a previous article, houses are increasingly overtaking retirement assets in expensive housing markets. Will increasing the Home Buyer Program and extending the repayment grace period further erode retirement savings?  

Budget 2024 also introduced the concept of 30-year mortgages for first-time homebuyers, albeit only for those purchasing new builds — a risky step in a country that has one of the highest household debt to GDP ratio in the world. We are already seeing longer mortgage repayments with rising interest rates, so extending this even more seems ill-advised.  

My wish list going forward  

While the Plan does aim to improve transparency around rents through the Canadian Renter’s Bill of Rights, additional transparency in the housing sale process is also needed. It could limit overbidding.  

The measures aimed at reducing permit delays should help get projects approved faster. However, there is also work to be done on improving construction times, which have gone up by respectively 23 and 38 per cent for single-detached homes and apartments.   

The plan also mentions the role of the government in adjusting immigration based on housing supply and availability. This is good policy and I hope we stay true to that if our construction levels do not end up where we want them to be.