Housing prices would be 10% lower if Canada had kept pace with U.S., CMHC says

OTTAWA — Canada’s housing stock would be about 30 per cent larger and prices 10 per cent lower if this country’s building industry had been as responsive to demand as its American counterpart over the last couple of decades, says a new report from the federal housing agency.

The Canada Mortgage and Housing Corporation (CMHC) pointed the finger in the report released Thursday at excessive regulation largely at the municipal level and two other factors — geography and demographics — that are often difficult to influence.

In the U.S., the report said, there are fewer restrictions on zoning and the use of land in many metro areas, whereas many Canadian municipalities have building restrictions that have hindered the supply of homes and contributed to dramatic price hikes. The CMHC report, based on research from the Organization for Economic Cooperation and Development (OECD), found that those barriers left the Canadian industry less responsive to increased demand during the 2006-24 period of study.

Mathieu Laberge, the CMHC’s chief economist, wrote that there are two other key factors that have slowed the housing supply in Canada. First, many of this country’s major cities, notably Vancouver and Montreal, have mountains and waterways that are natural barriers to the construction of new houses. Second, Canada has fewer large cities than the U.S., leaving urban residents with fewer places they can move to find comparable jobs, thereby triggering new developments.

Paul Smetanin, president of the Canadian Centre for Economic Analysis, said international analytical housing models can be misleading because they rest on assumptions, including that the various jurisdictions have comparable regulations and labour pools.

Smetanin, who has been studying the Canadian housing sector for decades, said the Canadian housing market is in crisis largely because of bottlenecks that are hindering construction. The industry will build if the market conditions are favourable, he said.

“Industry is going to do what industry does.”

Canada’s housing crisis is neither new nor a secret. Demand in fact has been on the rise in most urban centres for decades as more Canadians have migrated to cities and immigration has climbed. But supply hasn’t kept pace, pushing prices increasingly higher.

Less than a year ago, the CMHC admitted that the crisis might get worse because housing starts were expected to fall in 2025, 2026 and 2027, leaving production at less than half the 480,000 that the CMHC says Canada needs to add each year over the next decade.

Rising costs are a big part of the problem. The value of land and materials, workers who build homes or install things such flooring and cabinets have all been on the rise, as has the margins of developers and suppliers.

But the biggest cost in the price of a new home (about 36 per cent), according to one recent study, is taxation, making the three levels of government the top beneficiary of the construction of a new home. About 70 per cent of those taxes are for development charges for sewer, water and electricity, land-transfer taxes, and HST. The other 30 per cent is for the indirect income and corporate taxes paid throughout the supply chain, but ultimately passed on to buyers.

Municipalities, in particular, tend to rely heavily on the taxes collected from housing construction and development charges. Some municipalities have started to lower their fees in recent months.

There’s no quick fix, however, to a housing shortage. Analysts say there’s often a lag of a dozen years or more from when a plot of land has been identified for a new home, subdivision or apartment building to when people are living there. It can take even longer when roads and key services — sewer, water, electricity — need to be added.

Governments at all three levels have in recent years tried to address the crisis.

During last year’s federal election campaign, the Liberals promised that 500,000 homes would be built annually over the next 10 years, triggering a level of residential construction not seen since the years following World War II.

Prime Minister Mark Carney has since promised a new Crown corporation called Build Canada Homes to provide about $25 billion in public financing for prefab and “affordable” housing, plus $10 billion in low-rate capital. Build Canada Homes would take responsibility for some programs now under CMHC and the new organization would rely on some public land for new builds.

The Liberals also launched the Build Communities Strong Fund, a 10-year, $51-billion program to help support the construction of water, sewage, transit and road infrastructure. The Carney government also promised to eliminate the GST on new homes that sell for less than $1 million to first-time buyers and, along with Ontario, cut in half the significant municipal development charges for multi-unit residential construction.

Economists point out that an increase in housing construction carries significant benefits beyond the creation of new homes: downward pressure on housing prices, economic activity and jobs through construction and the adjacent purchases of furniture and other items that new homeowners typically make. New buildings also mean a windfall for government coffers at all three levels.

National Post

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