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Boosting housing supply works with a lag
Homebuilders vigorously responded to booming housing demand during the pandemic─it’s just taken a while to move the needle on the stock of housing Canadians can move into. Building a home can take several years, especially when projects are large and complex. But, that shifted last year with housing completions reaching an all-time high.
Indicators suggest housing stock will continue growing solidly in the short term. The construction pipeline has never been more full with many projects near completion thanks to the bulk of units started two or three years ago.
But, slumping pre-construction sales are slowing the flow of units entering the pipeline. This could have negative consequences for housing supply growth in the medium to longer term.
We estimate homebuilders finished construction on a record-high 260,000 units last year, edging the previous record of 257,000 units set in 1974. Yet, this expansion still fell well short of the number of units required to close the housing supply gap.
We’ve seen a renaissance in purpose-built rental apartment construction in recent years—following decades of lackluster activity in this segment. There have been more rental units completed than any other type of housing in Canada’s large urban areas since 2022.
A record-high number of homes under construction points to completions remaining robust in the short term, but, the recent quarterly trend is showing some moderation—suggesting the 2024 tally may have hit a peak.
Housing starts have tracked lower in the past two years, even though the pace is still strong. Demand for new construction has plummeted. Pre-construction sales in the Toronto area slumped to levels unseen in decades, upending the launch of new projects.
Homebuilders’ inventory of move-in ready units has rebounded amid brisk construction activity and a sharp drop in new home sales since 2022. It’s now closing in on levels that prevailed before the pandemic. Condos represent almost half of that inventory.
The number of residential properties for sale is rising across Canada. It’s at a 10-year high in major and more expensive markets of Ontario and British Columbia.
Homebuilders were working on 345,000 units of all types in the first quarter of this year across census metropolitan areas—many of which are still unsold. In the Toronto area, for example, unsold condos under construction are six times higher than the standing inventory.
Lengthy and costly approval processes have dogged new housing projects. However, municipalities have green lit construction on a near record number of new units in the past year. That is not to say all administrative or regulatory roadblocks to construction have been removed, but there have been improvements.
The economics of new housing projects have become significantly riskier. Residential construction costs in Canada are up 36% since 2021—making it harder for builders to offer homes attainable to average Canadians, and preserve profit margins on long construction cycles.
The federal government’s immigration policy pivot last year will significantly slow household formation and growth in housing demand for all segments going forward. It will make narrowing the supply gap more achievable for homebuilders.
Robert Hogue is the Assistant Chief Economist responsible for providing analysis and forecasts on the Canadian housing market and provincial economies.
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