A comprehensive retrospective of CMHC housing reports

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00:00:03

CHARLES: 2023 has truly been a remarkable year for housing in Canada. This year, CMHC embarked on an ambitious journey to address the evolving landscape of housing in the country. As the demand for housing continued to grow and diverse challenges emerged, CMHC continued to lead the way in ensuring the stability and sustainability of Canada’s housing markets. Hello, my name is Charles Sauriol and I’m happy to be leading this discussion on the 2023 retrospective in housing in Canada. Joining me today is our chief economist, Bob Dugan, and deputy chief economist, Aled ab Iorwerth and Kevin Hughes. Gentlemen, welcome.

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(Visual: Four people are shown in conversation. They sit across from one another at a boardroom table. The four individuals are Charles Sauriol - Communications & Marketing, Bob Dugan — Chief Economist, Aled Ab lowerth — Deputy Chief Economist, and Kevin Hughes — Deputy Chief Economist.)

00:00:43

ALED: Thank you.

00:00:43

BOB: Nice to be here.

00:00:45

CHARLES: So I guess 2023 really was a remarkable year on many fronts. Housing has been top of mind not always for the right reasons and CMHC has also been part of that landscape so let’s just start with what would you say are the biggest takeaways for you, for each of you of what we saw this year in 2023.

00:01:11

BOB: Well, I think for me the story in the economy continues to be high inflation and so we’ve seen a bit of an improvement over the last year you know, it peaked in June of 2022 at about 8.1% inflation has moved down, but it still remains a problem. When you look at average hourly earnings, it’s still growing at about 4.8%. Core measures of core inflations are still elevated and so there’s still work to do and what this means for housing is interest rates are higher so interest rates have had to come up much more than people thought and they’re staying higher for longer and this is having an impact on housing demand and it’s having an impact on households that have a lot of debt in Canada because of you know, the high price of housing and so it’s making things a little bit harder and it’s slowing the economy.

00:01:54

CHARLES: Right. Kevin, anything?

00:01:56

KEVIN: Definitely. I think you know, for economists they’re are always looking at the short term impacts and also longer term more systemic or you know, like chronic problems and I think 2023 we saw the cyclical problems you know of inflation, slow economic growth compounding the more chronic and fundamental problems in the market lack of supply and just what you said before about you know, housing was on the public’s mind for good and for better, I think there are always probably good reasons but the perspectives are coming from different areas.

00:02:29

CHARLES: Right, right. Aled?

00:02:31

ALED: Yeah, it just seems that there’s genuine concern now about housing. Housing is becoming a number one topic issue, the level of debt associated with housing, concern about refinancing coming up. It just seems to be moving to the top of the agenda and we are on the positive side starting to see some policy changes that could help us in the future.

00:02:53

CHARLES: So sometimes needs the darkest before the dawn shall we say?

00:02:55

ALED: It’s possible, but there’s a lot of work to be done.

00:02:58

CHARLES: Right, right, right. So anything that happened this year that you didn’t expect would happen or something that didn’t happen that you did expect, any surprises?

00:03:10

BOB: I think for me the biggest surprise has been the persistence of how strong housing starts have been and so in an environment when you see you know, very low unemployment rate, very high material costs and higher interest rates, you’d expect you know, housing demands to decrease and it did, but housing starts didn’t really go down by as much as we had thought. We were expecting them to be in the 215,000 unit range and they’ve remained really quite high, in fact, they’re turning around 250-260,000 units over the past 6 months so starts have been very high. They’ve come down for single starts as expected, but where we’ve really be surprised is multiple family starts particularly in Toronto and Vancouver.

00:03:52

CHARLES: Absolutely. Kevin, anything that surprised you?

00:03:54

KEVIN: Yeah, when you dive deeper into those results, you see that the centers where you know, there’s less high res construction where they are maybe more susceptible to current conditions, that’s where you saw the weakness but as Bob was saying you know, there’s definitely been strength in the major centers and I mean this is one of the reasons why at CMHC we’ve always had people you know, analysts or economists who are on the ground talking to realtors, talking to builders and giving this extra information that kind of gives us that extra information that we need you know, maybe the general public would not have or even like most housing observers.

00:04:31

CHARLES: Right. And Aled, anything that you thought would happen that didn’t?

00:04:38

ALED: Well maybe well.

00:04:40

CHARLES: Or the opposite.

00:04:41

ALED: Yeah, I was thinking of the opposite because there are some things that we’ve been saying for many years that there’s a lack of housing supply too that we’re concerned about the levels of that and so we’ve had these points for multiple years but this year those messages seem to have hit home.

00:04:56

CHARLES: Right.

00:04:56

ALED: And so I’m not sure if there’s some concern getting more into a crescendo that people are really starting to find that something is not quite right through the Canadian housing system.

00:05:06

CHARLES: Right, right, right.

00:05:08

ALED: And the surprise is that these messages seem to be hitting home and it’s really creeping up the agenda as I said earlier.

00:05:15

CHARLES: Understood, right. So you talked about starts not exactly what you expected, but let’s talk about supply and gap, the supply gap. It’s been referred to everywhere from the political sphere to the public sphere and as you’re immersing yourselves into this work, what’s really stood out, Aled?

00:05:41

ALED: Well, it’s really the traction and the attention that’s been given to the numbers. It seems to have really captured the imagination both in the policy circles, but also in business among households so there is really not much greater awareness on the importance of increasing housing supply, that’s really moving up the agenda. We’ve seen policy changes in Ontario the last couple of years. British Columbia is moving again this year with legislative changes so there is directional change there we hope. There may be still a lack of appreciation of how long this is going to take, I mean the housing system is slow to change and housing affordability is going to take many years to solve and a lot of efforts. It’s not just a question now of government policy, but we need the business sector to really step up as well.

00:06:35

CHARLES: Bob, maybe you could provide a bit more here. Why is this work important?  Why is the work we’ve been doing for supply gaps you know, obviously we’ve changed the narrative, but why did we embark on it?  Can you expand a bit more on that?

00:06:55

BOB: Well, I think it’s so important because prior to us embarking on this, a lot of the policy in the housing market was targeted towards dealing with strong demand and so the problem with that is it’s very tough to have longstanding results that will last. Really the population is growing overtime and so you can deal with demand in the short term, you can have policies that move some of that demand from the rental market to the ownership market or the other way around, but in the long term you know, if you want to deal with affordability for everyone, you have to sort of grow the size of the pie. You need more units. As of right now, so we estimate that by 2030 the gap will be about 3 and a half million units. Right now, it’s already about 2 million units so there’s a really short fall, we have to build a lot more units, actually we have to double the pace of starts if we want to get to 2030 and restore some measure of affordability for people.

00:07:48

CHARLES: Right, right, right. Kevin.

00:07:49

KEVIN: Yeah, I can speak about the analytical part of this work and like you know, if you look at the first phase of the estimating supply gaps project where we looked at 2 very broad and important fundamental factors, the demographic factors and the economic ones, in our first pass we looked at these in a very broad sense. Now what we’re doing is we’re really really diving deep into both the demographic side and the economic side and when you do that work, and Aled can attest to that, you know we really see how complex the housing system is and not a surprise to us but you know, when we do that work, we see how many things are dependent on each other, what are the feedback mechanisms and this work is really going to an extreme amount of detail and we’re really looking forward to presenting this work in 2024.

00:08:42

CHARLES: Yeah, great. And we talk about supply gaps, we’re not just talking about first time homeowners or people who are in homeownership, we do put a lot of emphasis around purpose built rental and where we need more rental and we release the rental market report every year, it’s a really big time flagship report for us. We put out some new data this year and I was wondering something that we wanted to highlight around affordability and that was about renter turnover and the impact of that. I was wondering maybe you could expand a bit more maybe Kevin.

00:09:16

KEVIN: Yeah, so the rental market survey along with the starts and completion survey seemingly sees long survey going and an important one obviously you know, for obvious reasons the rental market is a major market and one of very much importance. So last year what we did is we were able to develop 2 extra measures, one measuring the stock of the rental market that was accessible to very low income renters and what we see is that that stock is very low. Maybe Montreal is a bit of an exception, but it generally is very low so that’s one thing. The other thing is looking at the comparison of let’s say the general rent or the average rent or the rent of occupied units to those that had just been turned over and we see obviously, no surprise, a big gap there. So for people who are entering the rental market you know, they are facing you know, quite higher rents than what you would have reported just if you had the average so this gives us a bit more of an idea of how precarious the situation is for renters.

00:10:19

ALED: Right. But I think the key thing to note with this data is that it shows us what the symptoms of the problem are so there is a lack of supply there and that’s why you have these big rent increases. I mean if we were to try and regulate the control, we could have a real backlash in terms of new supply being built. These big increases and turnover around are a symptom of the problem and not the cause of the problem.

00:10:44

CHARLES: Maybe expand on regulatory measures, what do you mean exactly?

00:10:49

ALED: Well, there’s a whole pile of regulatory measures that impact the housing system and our concern obviously there’s a need for some of these regulations to protect renters from opportunistic behavior to ensure that buildings are built properly so environmental protections and so forth, but our concern is that a lot of these regulations also adversely affect new construction whether that’s purpose built rental or just new homeownership construction so that’s why we had the very important release in July I think of a survey that looked at regulations in all of housing across Canada.

00:11:33

CHARLES: So we talked about the challenges for renters, lack of supply, lack of choice. If they are turning over to a new apartment, it’s costing them a lot and I’d like to maybe delve into that a little bit later, but what are the challenges for those that are providing the supply, that are developing the purpose built rental supply?  What are they seeing as challenges, Bob?

00:11:57

BOB: Well, I mentioned earlier the cost of building you know, high interest rates, high labor costs, high material costs, those kinds of things, but there’s also things at the local level like the amount of regulation that exist that can really slowdown the process because even if a builder wants to build a building right now, in cases like Toronto it can take 8 years from the time you want to build a rental building until people are moving in so it’s a very slow process, it takes time. Some of that is it’s not all construction time. A lot of that time can be the result of regulatory hurdles that people have to jump through and so there was a survey earlier this year that sort of looked at this and there was a pretty strong correlation between cities where they had more ownerless levels of regulation, affordability tended to be worse in those cities and that’s probably because supply is slower to respond as a result.

00:12:51

CHARLES: So we can incidentally say that that’s Toronto, Vancouver and Montreal shall we say, or?

00:12:58

ALED: Increasingly Montreal I think.

00:12:59

CHARLES: Increasingly Montreal. And going back to renters turnover. Have we seen anything different for because housing is also a provincial purview around rent control. How has that impacted or not impacted the ability of affordability for renters for example has it?

00:13:25

KEVIN: Well going back to the measure that we were discussing before, what we see in centers where there are what we call rent control so recommendations for how rents will increase, in those centers we saw a bigger gap between the occupied rent and the turnover rent which is not surprising because you know, when people are in a lodging, their increases are you know, like incremental following certain indicators whereas when an apartment is vacant then there’s repairs, there’s renovations and there’s also the market you know, so that obviously explains it a lot more as opposed to cities where these are more happening in a general sense the increases are larger, but then there isn’t that big of a gap. So we saw that last year, we’re looking forward to see the data in our coming survey as well.

00:14:19

CHARLES: Right, but with increasing lack of supply, it can become a problem like it’s exacerbated, right?

00:14:25

KEVIN: It’s compounding the problem.

00:14:25

CHARLES: Yeah, right.

00:14:27

BOB: I mean I think we have to do a better job of understanding how some of these policies affect investment in the sector as well because you know, you look at a place like Edmonton where there’s no rent control, both average rents are lower than in some of the places with rent control and the increase in rents is much lower as well and so is the responsiveness of supply in those centers somehow related to some of the policies that govern the behavior of landlords and maybe in a market where there are fewer restrictions, maybe capital flows more readily to real estate and we see more construction and better balance between supply and demand.

00:15:07

ALED: Yeah, I’d like to really emphasize that last point because obviously we need a lot more rental to be built and that is going to take a massive amount of money. I mean we came up with over a trillion dollars for the entire housing system, but obviously a large amount of that is going to be in purpose built rental. And so we need the financial sector investors to step up and invest in this sector and they need the incentive to do that.

00:15:31

CHARLES: Right. So let’s talk about this over one trillion dollar investment. This is not something that governments will be able to take on so what’s the message for people listening to this?

00:15:42

ALED: We need the private sector involved. We need the private sector involved at scale and they need the incentives to do that so we obviously have a lot of trade-offs in this sector, we need effective regulation. I mean we don’t need people exploited, we need high quality buildings to be built so we need that sort of regulation, but we also need the financial returns of investors to be sufficient to invest in purpose built rental in particular because it’s very difficult for people to get into ownership now in Toronto and Vancouver and these cities will rely on having a large rental sector.

00:16:21

CHARLES: Right.

00:16:23

KEVIN: The incentives are key and I think that to get a better hold of that, we need to be listening to these developers more to the business people who have a really you know, a reality that is maybe not understood or taken into account. I mean for sure when you hear Canadians’ difficulties and there are great difficulties with housing you know, that is certainly something that resonates a lot. On the business side, it seems that that message may not be as heard, but yet as Aled was saying, it’s essential for them, they’re our key partner in this and we need to hear them.

00:16:56

CHARLES: Looking forward as we just did retrospective so maybe a bit of a glimpse into the near future. What do you see happening in 2024, any of you?

00:17:08

BOB: Well, I think in the short term it’s a cyclical story so we’ve seen a tremendous increase in interest rates as I mentioned earlier and that’s slowing the economy. And so in the short term this could mean you know, a little less demand for homeownership, further weakness in prices in the short term, but what this means is as the economy continues to grow though in the longer term, the trend still seems to be one where affordability is going to be a challenge. We don’t have enough supply, we’re not building enough homes and we have a really tall order you know, in order to sort of get supply up to the point where we can restore affordability so some short term cyclicality, but in the long term I think it’s the same problem: supply and affordability.

00:17:52

CHARLES: Kevin, maybe your thoughts for next year?

00:17:54

KEVIN: Well yeah, on the cyclical story, nothing really much to add, but on the CMHC story, we’re going to be quite busy with a lot of things notably the finishing off our second phase of the estimating supply gaps project. We have a series of studies on productivity in the construction sector which is I think a discussion that we need to revamp a lot. Rental market survey is coming up in the first quarter so that will be very interesting to see if any changes there are and that so it’s busier for us.

00:18:27

CHARLES: Right. Aled?

00:18:29

ALED: Yeah, some uncertainty as well so I agree with what Bob was saying about the cyclicality, but we do have risks in that area as well through refinancing and what will happen, when will interest rates start coming down and when our people starting to face a refinancing risk so there’s risks there. I think the other area where we really need to focus more on is moving more towards solutions so we have an enormous challenge ahead of us to get more housing supply built, but how do we actually get that. As Kevin mentioned, increasing productivity ineffectiveness in the private sector is one important area, but then there’s a whole you know, do we understand enough about the construction process and how can we improve that process further so there’s a lot of work still ahead.

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00:19:19

CHARLES: Thank you all of you for spending some time with us today and talking about what we’ve seen this year and what we can expect in the next coming weeks and months. I do think 2024 will be another very remarkable year.

00:19:31

ALED: Thank you.

00:19:33

BOB: Thank you.

00:19:33

KEVIN: Thank you.

00:19:34

CHARLES: And thank you to our listeners today. Please visit cmhc.ca for more information on our publications and reports. We do want to hear from you. Feel free to leave a comment with your feedback on this discussion. Stay tuned for more conversations with our housing experts and be sure to subscribe to our newsletter and our YouTube channel and also follow us on all our social media platforms.

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