The Impact Of Supply Vs. Demand On Housing Affordability

Published On: May 12, 2022Categories: Insights

The current state of the real estate market in Canada has people concerned. Over the past year, affordability has declined at the fastest pace in more than 26 years barring many first-time homebuyers from getting on the property ladder. As prices continue to rise, the general feeling is that there’s nothing people can do in the face of soaring inflation and higher costs of borrowing. The notion of an affordable single-family starter home may be a thing of the past. The Financial Post remarked that “the average selling price of a Canadian home has surged more than 50 per cent in the last two years, driven by record low interest rates and tight supply.”

The National Bank of Canada’s Housing Affordability Monitor paints a bleak picture of the “worst affordability since the mid-90`s with Toronto, Hamilton, Ottawa and Halifax showing levels not seen since the start of this century.” The increase in interest rates was cited as a contributing factor which caused monthly mortgage payments to climb to 67.3% of the median pre-tax household income. This substantial increase is unsustainable for many families.

IT ALL COMES DOWN TO SUPPLY AND DEMAND

There are numerous factors that contribute to rising house prices, but the biggest issue is supply. In the Government of Canada’s Federal Budget 2022, further clarity was provided. “Put simply, Canada is facing a housing shortage—we have a lower number of homes per person than many [Organisation for Economic Co-operation and Development] OECD countries.” To accommodate our growing population – including birth rates and immigration – over the next decade, Finance Canada and the Canada Mortgage and Housing Corporation estimate that at least 3.5 million new homes will need to be built by 2031. That works out to building around 400,000 homes per year for 10 years. Canada currently averages around 286,000 new houses per year according to 2021 data from the Canada Mortgage and Housing Corporation and Canada is experiencing a severe labour supply shortage.

BUILD UP, NOT OUT

Another consideration for these 3.5 million new homes is where they will be built. This many single-family homes require a massive amount of space. “With growing human populations and demands on natural resources, land scarcity is increasing,” said Dawn Parker of the Environment’s School of Planning and Waterloo’s Institute for Complexity and Innovation. Cities like Edmonton, Alberta have already realized that we need to grow upwards, not outwards as they introduce their Zoning Bylaw Renewal Initiative. Edmonton’s city planners acknowledge that multi-residential properties are needed to “bring the ‘transformational’ long-term goals in the City Plan to life, including ‘15-minute districts’ [areas that allow residents to complete daily activities within 15 minutes of travel time within a district] and more infill and transit-friendly development.”

While single-family homes are becoming increasingly unaffordable, more people in different life stages are choosing to rent instead of buy. The premium for buying compared to renting a two-bedroom condo in the GTA has gone up by 15.4% in 2022. Until 2018, the opposite was true; mortgage payments were generally lower than average monthly rents. According to an interview conducted by CBC News, Canadians are starting to realize that “renting right now seems to be the better option overall.”

APARTMENTs ARE THE KEY

With mortgage rates going up, a volatile stock market and increasing inflation, renting affords predictable monthly expenses, offers flexibility, and doesn’t come with all the responsibilities and costs associated with home ownership.

Demand for multi-residential properties, like apartment buildings, is constant and is driven by land scarcity, demographics and population growth, the challenges of new home affordability, and an increased focus on work-life balance. Whereas many people are being forced further away from urban centres due to housing costs, apartments in key locations are an essential housing alternative. In the same footprint as a handful of single-family homes, an apartment building can accommodate hundreds, if not thousands of people. In some urban areas, the apartments may already be present but are in dire need of rejuvenation.

INVEST IN THE SOLUTION AND GROW YOUR WEALTH

Canada is in desperate need of more housing solutions. Among the G7 countries, Canada has on average the lowest housing supply per capita. The persistent national housing shortage, most pronounced in Ontario, is threatening to worsen Canada’s housing affordability problem while home prices are already surging to record highs.

Equiton’s Apartment Fund targets underperforming and undervalued multi-residential apartments and select new developments in Canada. One of our current projects in the Apartment Fund, the Riverain District, is a large-scale, multi-phased development that will bring much needed housing to Ottawa with over 1000 upscale rental units. A well-situated neighbourhood, the Riverain District facility will offer condo-like amenities and over 32,000 sq ft of commercial space designed to provide new amenities to this ideal location, just 10 minutes from Parliament and close to the Rideau River and the ByWard Market. It’s a 15-minute neighbourhood in the making.

Learn more about Equiton’s Funds by emailing inquiries@equiton.com.