Governments of all stripes are scrambling to address the housing supply shortage in municipalities across the country, especially in major cities. From the federal Housing Accelerator Fund to Ontario’s now-aborted plans to open up the green belt for sprawling suburban development, governments are working to set the private sector loose to build, build, build.
As this has been happening, the Bank of Canada has been on a multi-year campaign of raising interest rates to bring down inflation. The explicit goal of interest rate raises is to “cool” the economy. How has that program been affecting housing prices?
A quick look at the numbers shows a dire situation for new builds in the private sector.
Developers are investing less in new residential housing construction than they were in April 2020—the height of pandemic economy shutdown. Compared to the worst of the pandemic, investment in new single-family homes is down 21 per cent. New row homes are down eight per cent, and new apartment construction is down two per cent.
Compared to February 2022 when rate hikes started, the numbers are even more dire. Investment in single-family homes is down 36 per cent, semi-detached houses declined by 27 per cent, new row home construction saw a mild decline of two per cent over, and apartment buildings cratered by 19 per cent.
The Bank of Canada estimates that the worst impacts of rate increases take two years to hit the housing sector and the housing sector is the main vehicle for rate hikes to hit the economy. Right now, it has been 18 months since the first rate increases, but most of the bigger rate increases have occurred in the past 12 months—so the worst is yet to come.