The Real Economy, Canada

Canada has an acute shortage of housing. Easing regulations would help solve that.

Dec 12, 2023

Key takeaways

Canada’s gap between supply and demand in housing is expected to reach 3.5 million housing units by 2030.

The most direct path to closing Canada’s housing gap is through new construction.

Reforming housing regulations can help spur more construction and ease the shortage of available units.

Economics The Real Economy Real estate

Canada’s housing crisis keeps getting worse.

The latest Housing Supply Report by the Canada Mortgage and Housing Corporation concluded that the level of new construction is too low to address the long-term housing supply gap.

The housing supply grew by only 1 per cent in the first half of this year, according to the housing agency’s report. If Toronto and Vancouver apartment construction is excluded, housing starts declined in most of the country. Projects are also taking longer to complete.

And there is little sign of relief. The gap between supply and demand is expected to reach 3.5 million housing units by 2030, representing nearly 20 per cent of total supply, according to the housing agency.

Closing this gap has prompted many proposals, from freeing up green space to rezoning areas limited to single-family homes.

But the most direct path is through new construction.

Put simply, Canada needs to make it easier to build homes of all kinds. This can be done by reforming housing regulations, in particular by easing zoning laws and streamlining the approval process.

These changes would allow enough housing to be built without turning to protected lands like the Greenbelt—a proposal that has been made only to become engulfed in controversy.

A classic supply and demand problem

The current crunch has been years in the making. Demand for housing in Canada had been growing steadily over the past decade because of rising incomes and low interest rates, but it has shot up in the past couple of years as the population has increased.

Canada’s population growth, currently at 2.9 per cent annually, ranks first among the G-7 nations and is among the top 20 countries in the world. Almost all of this growth, or 98 per cent, stems from immigration; the rest comes from Canada’s existing population. In addition, there are more than 2 million non-permanent residents in Canada, double the number from just two years ago.

The influx of new residents has led to a surge in demand for housing, which in turn has been compounded as millennials and Gen Zers form their own households and want places of their own.

But except for the brief construction spike in 2021 and early last year, when mortgage rates were historically low, residential construction has stagnated since 2008.

After the Bank of Canada began raising interest rates last year, building permits, housing starts and housing completions have fallen and remained flat while the population grew.

Building permits stood at $11.7 billion in July, little changed from the middle of 2021. Similarly, housing starts in the third quarter stood at 254,000, on par with 2021 levels. 

When demand increases and supply stays flat, prices shoot up. While home prices have cooled a little as high interest rates deter buyers, they remain 25 per cent above August 2019, before the pandemic.

The rental market is even worse as new immigrants and young people often rent before buying, and home prices get further out of reach. Rents have increased this year by 9.6 per cent annually after rising by 12 per cent last year.

The supply bottleneck

Those rising rents prompt the question of supply. Higher prices, it would stand to reason, spur developers to build more to meet demand. But that has not been the case this time around, for three reasons.

  • Geography: Several major cities have geographical constraints. For instance, Vancouver is nestled between the Pacific Ocean and the mountains, while Montreal is an island. Outside Toronto, the Greenbelt and its 2 million acres of pristine wilderness and farms have meant limited development since it was established in 2005.
  • Cost: High inflation and high interest rates which, combined with tight lending conditions, make borrowing challenging. Although the federal government recently removed the federal goods and services tax on new purpose-built rental housing projects, this move is unlikely to override the impact of high rates.
  • Regulation: This is the one constraint that, if resolved, would lead to lasting, structural improvement in the housing supply. Specifically, lengthy approval times and restrictive zoning laws and land use regulations can put a hammerlock on development.

The red tape conundrum

Zoning laws prevent higher-density housing from being built in urban areas where demand is high. Land use restrictions prevent housing from being built at all, such as in areas zoned for commercial use, even as the need for commercial space declines and demand for residential housing increases. Thus, the number of housing units that could be built is limited by design from the start.

Then there is the lengthy approval process that is riddled with red tape. According to the World Bank, it takes an astonishing 249 days in Canada to obtain approvals and building permits to build a warehouse without zoning changes. Compare that to 81 days in the United States and 121 days in Australia, and there is little wonder why Canadian developers are so slow to respond to demand.

Partially because of the relative ease of approvals in many parts of the United States, housing prices and incomes have been more in sync while housing costs eat up an ever-growing share of income in Canada.

How are home builders confronting the current market in Canada? 

How regulation reform could help

Relaxing zoning laws and streamlining the approval process could allow developers to build more, build faster and build for less.

With more relaxed zoning laws, developers could build where they previously might not have been allowed, such as in areas currently zoned for commercial use.

In Toronto, the city with one of the worst housing shortages, 70 per cent of land is zoned for single-family housing. Relaxing density restrictions like single-family zoning and minimum lot size requirements would open ample opportunities to add supply.

In addition, higher-density housing units—smaller houses, semi-detached homes and townhouses—tend to be cheaper to construct not only because they are smaller but also because they require fewer resources.

Allowing developers to build more easily results in higher supply, which alleviates the shortages and eases prices.

Regulatory reform allows developers to build faster. It takes developers more than nine months to obtain approval and building permits for many apartment buildings in Ontario. In British Columbia, the process can take up to two years.

The longer the approval and permitting processes, the longer it takes to deliver units to the market, which exacerbates the supply problem.

In the United States, by contrast, streamlined permitting processes for residential construction in cities like Houston and Atlanta and fewer zoning regulations have kept housing relatively affordable despite population growth. In some U.S. cities, rental prices have even declined.

Some cities in Canada have been more successful in keeping red tape to a minimum. Take Edmonton, the Canadian city with the easiest rules for building new homes. Supply in Edmonton has been better able to keep up with demand and prices have remained in check.

Waiting incurs significant costs, including opportunity costs, taxes on vacant land, carrying costs of loans, increasing interest rates, and labour and material costs. These costs are then passed on to homebuyers and renters. Then there are the costs of obtaining approvals, including costs of conducting tests and holding meetings and filling out applications. Streamlining the process would save time and money, and encourage supply.

The takeaway

The most viable long-term solution to Canada’s housing crisis is to increase the supply. This will require relaxing zoning laws and streamlining the approval process. To be sure, many regulations and building codes exist to ensure safety as well as improve environmental standards. But making it easier for developers to build—while not gutting sensible regulations and codes—is crucial to solving Canada’s acute housing shortage. Canada does not just need more affordable housing; it needs more housing so housing becomes affordable. 

RSM contributors

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