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Building 620,000 more homes by 2030: impossible!

After successful years in 2020 and 2021, housing starts are expected to lag for 2022. A significant drop is also expected in 2023. (Photo: 123RF)

GUEST BLOG. To restore affordability, the Canada Mortgage and Housing Corporation (CMHC) estimates that 620,000 additional housing units must be built in Quebec by 2030. Roughly speaking, the pace of construction should be doubled. In my opinion, we will not achieve this objective. We are going in the opposite direction: residential investments are cyclical and sensitive to interest rates.

After successful years in 2020 and 2021, housing starts for 2022 are expected to fall by 19.7% compared to 2021. A significant drop is also expected in 2023.

“The current rise in interest rates has not yet produced the full restrictive effect on the residential real estate market,” explains Hélène Bégin, senior economist at Desjardins Group and author of an excellent study published on November 9, 2022.

New construction

There has been a significant increase in labor costs and a shortage of workers. In addition, with the sharp increase in price and the shortage of certain materials, construction costs continue to climb and there are delays in the completion of several projects. All this inflates the prices of new buildings.

With rising interest rates, borrowing costs are on the rise for developers and builders. The start of residential projects is thus more limited, particularly for rental apartments whose rent would be too high in relation to the budget of the target clientele.

The locomotive of construction is the rental. In 2022, it is estimated that there will be 36,500 housing starts. We add 6,700 condominiums and 16,500 houses for a total of 60,000.

Tenants

Rising interest rates are slowing tenants’ access to property and slowing down the construction of new housing. This is exactly the opposite of what Quebec needs. The housing crisis will get worse.

Our governments are faced with several difficult dilemmas. For example, we should welcome more foreign workers to reduce the labor shortage in construction. But accepting more immigrants also increases the demand for housing.

Rental apartments down

The rapid rise in interest rates undermines the profitability of certain projects which are postponed or abandoned. For a project to be profitable, rents must increase more than the market is able to absorb. From January to September 2022, housing starts for conventional rental apartments in Quebec decreased by 5.3%, compared to the same period last year.

Construction declined in several major centres, but not in several suburbs on the Island of Montreal. Vacancy rates of less than 1% for rental units are the cause.

The table below shows that there was a significant increase in Gatineau and especially in Trois-Rivières and in several medium-sized agglomerations.

The construction of residences for the elderly has already dropped by half compared to last year. The pandemic has pushed their vacancy rate up to 12.8% in 2021. The recovery seems a long way off given the market conditions and the higher cost of borrowing.

Sharper decline for condominiums and houses

From January to September, housing starts fell by 22.5% and those of condominiums by 16.4%, compared to the same period in 2021. The rise in mortgage rates comes on top of the rise in the price of homes and reduces the number of potential buyers.

In the Montreal region, few houses are being built due to their high cost, the shortage of land and zoning constraints. Municipalities promote the construction of rental or condominium buildings to increase densification.

When construction is good, the economy is good

Several experts propose measures to stimulate construction or access to property:

● Increase financial incentives by governments and CMHC;

● No GST and QST on new construction;

● Eliminate transfer duties for first buyers;

● Take measures to reduce the shortage of labor in the field of construction;

● Update municipal zoning rules and speed up permit issuance;

● Allow mortgages to be amortized over 35 years;

● Intergenerational RAP, which could perhaps go through the CELIAPP.

To fight inflation, the best approach is to implement measures that increase supply. Encouraging demand too much would make matters worse, not only by stimulating spending, but also by prompting a more aggressive response from monetary authorities. This would cause a more severe recession.

It is not desirable to allow the housing crisis to worsen without doing anything.

I invite you to consult my previous articles.

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