Time to rethink the affordability puzzle

Emerging Trends in Real Estate 2019 ®

On the issue of housing affordability, it’s time to move beyond efforts to limit demand by looking at  the supply side of the equation and reexamining government interventions. Real estate players are also turning to technology and innovation, and Canadians are rethinking where, and how, they live.

Rethinking Canada’s affordable housing strategy

Nobody questions the existence of a housing affordability challenge in major Canadian cities, most notably Vancouver and Toronto, with survey respondents citing land costs as the primary development concern headed into 2019. The disagreements arise over what to do about it.

Across Canada, all three levels of government have taken stabs at the problem, with their efforts mostly focused on curbing demand to try to control the increase in housing prices, which are forecast to rise modestly. The federal government has further tightened rules for mortgages, imposed new restrictions on government insurance for low-ratio mortgages and issued new reporting rules for primary residence capital gains exemptions. Provincial governments have also introduced new taxes aimed at curtailing speculative investing.

A key issue with the federal government’s approach is that Canada doesn’t have just one national housing market. And since each local market is unique—with its own issues, challenges and opportunities—applying one approach across Canada will always fall short. While the underlying objectives are appropriate for the current environment, these measures on their own are unlikely to solve the affordability puzzle.

Interviewees lamented that all sorts of government regulations are already posing challenges for all real estate sectors, with many saying they expect affordability will only get more difficult for most people. Also contributing to the challenge is the fact the actions taken so far have addressed the demand issues but not the real issues on the supply side.

Rethinking Canada’s affordable housing strategy

A key issue with the federal government’s approach is that Canada doesn’t have just one national housing market.

The role of government

Until governments change land development process, including the time required to get entitlements, the supply of new housing won’t meet demand in major cities and affordability won’t be brought under control. As one interviewee noted, “It cannot get cheaper because of cost and demand.” Some cities, including Edmonton and Montreal, have managed to bring new housing supply on line to balance rising prices, but Vancouver and Toronto have yet to do so. The result is that housing affordability hit its lowest level in 27 years in 2017, according to RBC Economics.

What can governments do to address affordability? “Bureaucracy is not responsive or helpful,” one interviewee said. “The impact is to put even more pressure on supply and, therefore, put more pressure on increasing prices.” When it comes to the Greater Toronto Area (GTA), some suggested the Government of Ontario needs a long-term strategy to expand supply. “Governments need to build more affordable housing. They need to fix the process to get more density and need to make a distinction between high-rise condo and purpose-built rental,” said one interviewee, who hoped the new Ontario government might introduce a more positive regulatory environment.

A common refrain across Canada was how hard it is to deal with municipal bureaucracy to get new supply on the market in a timely manner. A Vancouver-based interviewee said, “Municipal red tape slows supply,” while one in Halifax suggested municipalities need to ease zoning restrictions and be “held accountable to timelines.”

While high demand and limited supply are the main forces at play in these expensive markets, government development charges, taxes and levies are also a significant factor in the cost of home ownership. The average government charge for a single detached home is about $186,300, or almost 22% of the price of an average new home, according to a May 2018 report from the Building Industry and Land Development Association in Toronto. These development charges have doubled over a short period of time and appear to be on track to rise even more.

It’s important for the various stakeholders to come together to try to deal with affordability. Inconsistencies can be a challenge, as seen in the moves by various levels of government to limit housing demand in major cities even as the federal government continues to increase immigration levels, which adds to demand pressures.

The role of government

“In order to fix affordability, governments have to fix supply.”

Housing market drives mobility and lifestyle trends

The consequences of not properly planning for future housing needs may be severe. The proportion of household income needed to service the costs of a single-family home grew to 53.5% in Q1 2018, with Vancouver at a dizzying 119.3% (see report). As a result, millennials may abandon the urban core for the suburbs in search of more affordable housing, and high housing costs in cities like Vancouver and Toronto could make it difficult to retain skilled workers. In a survey of young professionals by the Toronto Region Board of Trade, 42% indicated they were likely to leave the GTA because of high housing costs.

An exodus looks like it’s already underway. Between 2012 and 2017, Toronto lost more than 142,000 people to other parts of Ontario, 78% more than in the previous five-year period, according to Statistics Canada. And over the next five years, Toronto, Vancouver and Montreal are forecast to see a loss of people to other areas of their province. While forecast immigration rates will help make up these numbers, it’s a consistent trend.

In addition to looking for cheaper regions in which to live, Canadians have been responding to high housing costs by forgoing ownership altogether. For the first time in decades, demand for rental housing is outpacing home ownership. Rentals now account for 32% of the country’s homes, according to the BC Non-Profit Housing Association’s 2018 Canadian Rental Housing Index. The trend towards renting has been taking root for several years. Our Emerging Trends in Real Estate 2016 report raised the issue, citing the rise of permanent renters as a growing and lasting trend. This is now a new reality for many Canadians and no longer just an emerging trend. But it’s important to note that renting isn’t a real solution to the larger affordability problem, given that those who forgo ownership in favour of rentals still face very low vacancy rates in markets like the GTA and Vancouver.

Housing market drives mobility and lifestyle trends

“Housing affordability will get harder for most people.”

Contact us

Frank Magliocco

Partner, Real Estate, Assurance, PwC Canada

Tel: +1 416 228 4228

Chris Potter

Partner Real Estate, Tax, PwC Canada

Tel: +1 416 869 2494

Miriam Gurza

MRICS Managing Director, Real Estate, Consulting, PwC Canada

Tel: +1 416 687 8143