The housing industry still has a ways to go to address Canada’s lack of accommodations and higher interest rates have damaged efforts to kickstart more construction.

In a new housing supply report released by the Canada Mortgage and Housing Corporation (CMHC), it found that 30,000 fewer housing starts happened in 2023 than a year earlier, largely due to higher interest rates.

“Our major concern is that we need to increase housing supply in Canada,” Aled ab Iorwerth, deputy chief economist with CMHC, told RENX Homes in an interview.

“I know they’ve come down a little bit now, but the main point we’re making is that these higher interest rates have had an adverse negative impact on housing starts, on housing supply.”

This has caused big problems in large cities, particularly Toronto and Vancouver, he said. Declines in those markets (including Ottawa) ranged from 10 per cent to 20 per cent.

Alberta bucks the national trend

While most regions are seeing slowdowns, the landscape is different in Alberta. Calgary and Edmonton led the rate of growth in housing starts according to the Fall 2024 Housing Supply Report.

But why does Alberta stand out? For one, its economy is “strong,” said ab Iorwerth. Its GDP growth topped those of Quebec, Ontario and B.C. by around 30 per cent.

“The Alberta housing system is still relatively — the emphasis on relatively — affordable, and so people are moving to Alberta from other parts of Canada, probably Vancouver mostly, but also to some extent, Toronto. The housing supply system in Alberta is responding. There’s growth on new supply in Alberta, so the system is responding and reacting.”

Overall, housing starts rose in the six largest census metropolitan areas (CMA) during the first half of this year, compared to 2023, the report found. However, with the population growth, this wasn’t enough to meet demand.

CMHC is pointing at higher interest rates over the past few years as the main culprit for these numbers, said ab Iorwerth.

“It seems to have an immediate impact on individual investors at the beginning, and individual investors are quite important for financing of construction in the condominium sector, and so with higher interest rates, they’ve been withdrawing; they’re not going ahead with pre-sales for condominium apartments, and so that’s led to less money being available for construction of condominiums.”

Again, this is true for most areas but not for Edmonton and Calgary, which saw increases in new construction during the first half of 2024.   

The challenge to raise financing for development

The challenging environment has meant a general slowdown for builders and developers, he said. 

“There’s a broader effect being felt even in the rental sector because a lot of the developers need to borrow money in order to fund construction, so-called construction loans. Obviously, as interest rates go up and there’s more scrutiny by the banks about whether the clients are credit worthy, this leads to challenge(s) for the developers and getting the funding for construction.”

The three recent interest rate cuts by the Bank of Canada, totalling 75 basis points, are helpful. Further cuts could continue to improve the situation, but a systemic problem remains,.

“We are seeing falls in housing starts today because of interest rates that started to go up a couple of years ago, so there’s quite a lot of lags in the system. But obviously, as interest rates come down, then getting access to construction loans is a lot easier.”

Besides higher interest rates, the pandemic also had an effect on the housing supply, said the report. The industry faced a tight labour market, combined with rising materials costs and shortages of those materials. 

CMHC also placed some blame at the feet of governments, particularly provincial and municipal, for some of the slowdown in growth.

“We’re still stuck with a system in which there are lengthy regulatory processes, so there are ongoing challenges about increasing housing supply, and something that CMHC is quite concerned about because we think this is the key to improve affordability,” ab Iorwerth explained.

Provinces, cities make positive moves

However, the report highlighted initiatives from provinces and cities that might alleviate some regulatory pressures:

• Ontario: Bill 23, More Homes Built Faster Act, 2022.
• B.C.: Bill 44, 2023 Housing Statutes (Residential Development) Amendment Act, 2023.
• Quebec: Bill 31 (2024) An Act to amend various legislative provisions with respect to housing.
• City of Toronto: Official Plan Amendment 653 of the Planning Act bylaw 822-2023.
• Calgary: Blanket rezoning (2024) and The Downtown Calgary Development Incentive Program.

All of these measures are welcome, according to ab Iorwerth, as they reduce the regulatory burden and make things somewhat easier for municipalities to encourage more investment in housing.

“There is a sea change happening that we need this extra supply quite urgently,” he said.

The federal government for its part has brought in new programs that allow for 30-year amortizations and increased the maximum level for uninsured mortgages from $1 million to $1.5 million, but more work needs to be done by lower levels of government. 

“There was an action plan announced in the last budget. So the federal government is stepping forward, but there’s still a need for municipal and provincial governments to make sure that their regulations are more efficient and that development charges are aimed particularly at infrastructure, and are not in any way excessive,” ab Iorwerth said.

Need for long-term capital investment

Some other possible solutions raised by CMHC include finding a way to bring in more stable funding for the industry by tapping into a under-utilized sector.

“What we need to think about (is), is there any way of encouraging really long-term capital and more involved in the sector. There are a lot of these pension funds in Canada. They have these long-term pools of capital. Is there any way of getting that capital deployed in more developments? I’m not sure exactly how [but] we need private-sector capital, and the pension funds are obviously one source of that, and they have access to really long-term capital.”

The current landscape remains challenging for the housing industry, ab Iorwerth said, and this should encourage some new ideas about how Canada can more properly increase the supply of new homes. 

“Obviously, with a growing population and growing incomes, there’s huge demand for housing, and so everybody really needs to step up on the housing construction. Whether we have completely the right business models for increasing housing supply, is something we need to continue to look at.” 

“The fact that building of condominium apartments relies so much of these individual investors does make me wonder whether we need to think a bit more deeply about how we develop condominium apartments,” ab Iorwerth said.