One of Canada’s largest banks is warning that expectations should be tempered that rising interest rates will have a real lasting effect on Canada’s housing market.
In a bulletin this week, CIBC states that the Bank of Canada’s rate hikes so far and additional hikes expected through the end of 2022 will only alleviate the symptoms of the hot real estate market for a short period of time.
Instead, economists with CIBC focused on the housing supply problem as the country’s overwhelming structural problem with the housing market.
“In fact, if history is any guide, the slowdown ahead could exacerbate the supply/demand mismatch in the market,” the bulletin reads.
“After years of combating supply problems using demand tools, governments at all levels are finally recognizing that the housing affordability crisis will worsen over time without adequate supply policies.”
The analysts argue that the demand for housing has been grossly underestimated, as current methods and estimates are “based on inaccurate assumptions and are too simplistic”.
Their reasons for the undercounting of demand include: 2021 household formation projects are based on 2016 data, which underestimate the number of immigrants and non-permanent residents since 2016; expired visas for non-permanent residents who are not counted as residents or households; the usual place of residence; and undercounting the number of headships for new immigrants and non-permanent residents.
“When it comes to looking at the housing mismatch, the variable to focus on to measure housing demand is family formation. And we assume that this number is accurately measured and written in stone. After all, municipalities rely heavily on those estimates when making decisions about land allocation and building permits,” the bulletin states.
“But the numbers of households are far from accurate. They are derived by the CMHC by translating population growth to number of households using estimates of the number of heads, or the number of households created from a given number of people. In that translation, however, a lot of information is lost, which leads to a gross underestimation of the real number of households in Canada, and therefore the demand for housing. And if the demand is counted too low, then the supply that municipalities make available to meet that demand will of course not be sufficient.”
CIBC’s solution is of course to tempt municipalities to have substantially more housing stock built.
But the bank also questions the country’s capacity to build the homes it needs due to the immense labor shortage in the construction sector, exacerbated by fierce competition from major infrastructure projects for the same limited pool of labor.
Although Canada had an immigration record of more than 400,000 people in 2021, hardly any of these new residents worked in construction.
“It is clear that in order to tackle the housing supply problem, a immigration component is needed. In addition, the policy was aimed at in training young Canadians in skilled occupations would help to ease the labor shortage,” adds the bulletin, noting that it now takes twice as long to build both low-rise and high-rise buildings than it did 20 years ago.
In addition, the rising costs of labour, materials and transportation all contribute to housing affordability.