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Why the new home supply in Ontario will likely worsen

The push for higher immigration

There is a mismatch between home supply and demand and the population boom is contributing to the divide. Therefore, the supply of new homes (rental and owner occupied) in Ontario will likely worsen in the short term. 

The federal government has increased immigration targets over the 2022 level of more than 430,000 immigrants to 465,000 in 2023, 485,000 in 2024 and 500,000 in 2025. Consider over the past year, fewer than 200,00 housing units were completed in Canada according to CMHC. There is a mismatch between home supply and demand and the population boom is contributing to the divide. The rental market is experiencing fierce competition and bidding wars are increasing rental unit prices. As a result, some immigrants are bypassing the largest urban markets.

David Green an economics professor at UBC questions the need to ramp up to 500,000 a year at a time when the economy is slowing and our housing market and health care system are strained. There seems to be an absence of a co-ordinated effort on behalf of all levels of government. However, the five largest publicly traded residential REITS in Canada have formed the Canadian Rental Housing Providers for Affordable Housing and have approached the federal government to provide capital so they can acquire and sell affordable rental units to non-profit, co-operatives and community land trusts.

The issues impacting housing completions

Across the country there has been a push to build more rental housing (purpose-built rentals) to help the growing number of residents who have long been priced out of the real estate market. But in Toronto developers have less incentive to build purpose–built rental buildings because demand has been high from investors seeking to buy pre-construction condos. In addition, the developer margins from condominium projects are more attractive for private developers when compared to rental buildings.

Rental development stalled in the third quarter of 2022 as year to date starts fell to 1,709 units, this caused the inventory of total rentals under construction in the GTA to decline to 19,011 in Q3 2022 from recent high of 20,215 in Q1 2022. The reduction is a result of the sharp increases in interest rates, construction costs and development charges that developers are experiencing. The slow down is occurring as monthly rental rates are soaring, the average condo rental hit $3.57 p.s.f. in the 2nd QTR of the year according to  condo research group Urbanation Inc. According to CMHC purpose-built rentals accounted for 10.7% of high-rise housing starts in Toronto in the first half of 2022, in the previous 5 years, the average was 17.4% for the 1st half of the year.

Below is a chart which compares the break-out of multi family starts versus condo units in the major urban markets across Canada.

Apartment vs Condo
Image courtesy: CMHC

The condominium market in Toronto has softened as pre-sale purchasers moved to the sidelines amid heightened market uncertainty due to the rapid increase in interest rates. Facing slow sales and higher costs, developers pulled back on launching new projects. The slowdown in new condominium sales and the number of pre-sale launches is not expected to negatively impact construction activity until the second half of 2023.

Another major factor impacting productivity on construction sites is the shortage of trades people in major urban centres from coast to coast. It is unlikely the issue will be resolved without more intervention from government, unions and trade associations; contributing to the shortfalls is the wave of retirements, Build Force a national industry organization estimate 257,100 construction workers will retire by 2029.

The Ontario Government has responded to the current housing shortage by targeting the construction of 1.5 million new homes by 2032 and is pushing the agenda with the passing of Bill 23-More Homes, Built Faster which proposes extensive changes to the policy led planning and land development system which guides municipalities in the province. It is a very good initiative however the current economic uncertainty of a possible mild recession and higher interest rates will make it difficult to get traction under this plan.

The next 12 -24 months

Benjamin Tal of the CIBC believes that the market will remain unaffordable even with the current market slowdown over the next 12 – 24 months. There is a lot of discussion regarding more affordable units however It is difficult to see lower new housing prices because of the protracted timelines to garner approvals and the longer construction schedules. The bigger challenge in the short term is the affordability index which is in the 60% of household income range, according to the National Bank of Canada the last time this measure was so high was in 1981.

One thing is certain, we are facing a housing crisis and we need more homes, of all kinds.

About Firm Capital

Over the last five years we have completed $4.1 billion in debt transactions. We pride ourselves in understanding a transaction quickly and providing deal structures that meet the needs of our clients, including first and second mortgages. Our loans can range from $1.0 million to $50.0 million and may go up to $100 million for select opportunities. Loan facilities are typically interest only, with terms ranging from 12 to 24 months. Our team comprises seasoned veterans with a multi-cycle track record of experience who work closely with our clients. In today’s market it is important for builders, developers, and investment property owners to work with a capital provider that has proprietary capital, can make decisions and is prepared to work with you in difficult times.

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