Building Permits, Rental Construction, and Canada’s Future Housing Market
A June 2024 Edge Realty Analytics report has highlighted some notable shifts in Canadian building permit and construction trends.In a surprising turn of events, Canada saw a significant increase in building permits issued in April 2024. Permits surged by 20.5% month-over-month and soared 81% year-over-year. This sharp rise was driven primarily by a record-setting number of multi-family housing permits, which include both rental apartments and condominiums.Source: Edge Realty AnalyticsDivergence Between Multi-Family and Single-Family HousingThis increase highlights a notable split in the housing market: while permits for multi-family units have hit unprecedented levels, single-family housing permits remain at 40-year lows. The Edge Realty Analytics report suggests that the vast majority of these multi-family permits are likely for rental properties, although specific granular data on this is not available.Source: Edge Realty AnalyticsHistorical Context Over the past decade, Canada has seen a dramatic shift towards rental construction. Rental units, which accounted for less than 10% of housing starts ten years ago, now comprise nearly 40%. The number of rental units under construction has ballooned from 20,000 to 140,000 during this period.Source: Edge Realty AnalyticsSource: Edge Realty AnalyticsA significant factor behind this growth has been the Canada Mortgage and Housing Corporation’s (CMHC) MLI Select program. This initiative provides developers with highly favourable financing terms, including low insurance premiums, up to 95% loan-to-cost financing, and extended 50-year amortization periods for projects that meet specific criteria related to energy efficiency, rental affordability, and accessibility.In regions like Ontario and British Columbia, where building codes already exceed the Canadian standards set by CMHC, developers could meet the MLI Select program’s criteria simply by adhering to existing codes. This enabled many projects to qualify for the most advantageous terms without additional effort, so these provinces saw a disproportionate boom in rental construction.New Rules for MLI Select ProgramHowever, CMHC recently announced changes to the MLI Select program to increase the focus on affordability. The new rules cap the points developers can earn from energy efficiency at 50, making it necessary to meet the other criteria, including providing affordable rentals, to qualify for the best financing terms. This means developers now need to commit to offering at least a third of their units at affordable rents, defined as costing no more than 30% of the median household income in each area.Anticipating these changes, developers rushed to push projects through before the June 18 deadline. This contributed significantly to the spike in building permits and housing starts seen in April and May 2024. In May, housing starts also exceeded expectations, rising 10% month-over-month to reach 265,000 units on an annualized basis, with rental units again leading the way, with the second-highest monthly numbers on record and accounting for a significant 43% of all starts last month.Source: Edge Realty AnalyticsExpected Slowdown in Rental ConstructionLooking ahead with these new CMHC rules, the report suggests the pace of rental construction, particularly in Ontario and British Columbia, is likely to slow down. Many developers in these provinces relied heavily on the previously easier access to MLI Select funding. As these changes take effect, some development activity may shift to other regions, such as the Prairies, where market rents are still above the CMHC’s affordability threshold. However, on balance, a net decrease in activity is anticipated.In the long term, the anticipated reduction in new housing starts across all types—single-family homes, condos, and rentals—suggests that Canada could face greater supply issues in the future. For single-family homes, the effects of reduced construction activity will likely become evident in the next 18 to 24 months. For condominiums, the lag between pre-sales and starts means that a drop in completions could be expected by 2028.
Canadian Secondary Suite Incentive Programs
Various levels of government have implemented secondary suite incentive programs to increase the supply of affordable rental housing. These initiatives are aimed at encouraging homeowners to convert existing spaces into rentable units or create new ones, for long-term rentals and housing. Budget 2024: Canada Secondary Suite Loan ProgramIn Budget 2024, the Canadian government introduced the Canada Secondary Suite Loan Program, under Housing, Infrastructure and Communities Canada*, as part of a broader housing strategy. This program offers homeowners up to $40,000 in low-interest loans to create additional rental units, such as basement suites or laneway houses. By easing financial barriers, the program aims to make it more feasible for homeowners to contribute to the rental market, especially in urban areas where housing demand is high. This initiative aligns with recent zoning reforms across major cities, making it easier to add density to residential properties.* Note that as of June 20, 2024, Infrastructure Canada (INFC) is now officially the Department of Housing, Infrastructure and Communities Canada (HICC). Provincial Programs Some provinces have also launched similar programs.British ColumbiaIn British Columbia, the Secondary Suite Incentive Program (SSIP), initiated in 2023 and expanded in 2024, provides up to $40,000 in forgivable loans for creating new secondary suites or garden suites (BC Housing). To qualify, the suite must be rented at below-market rates for a minimum of five years. This initiative is part of BC’s Homes for People action plan.SaskatchewanThe Saskatchewan Secondary Suite Incentive (SSI) Grant Program, launched in January 2024, offers homeowners up to 35% of the cost of constructing a new secondary suite, with a maximum grant of $35,000. The grant is designed to help homeowners generate supplementary income while increasing the availability of rental units in Saskatchewan communities. The program also ties in with the Provincial Sales Tax (PST) Rebate for New Home Construction, to increase affordability for new builds.Nova ScotiaNova Scotia’s Secondary and Backyard Suite Incentive Program offers loans to help build a secondary or backyard suite on a primary residence. Funding covers up to 50% of eligible project costs, with a cap of $40,000. The applicant must cover the remaining expenses. This support is provided as a forgivable loan with terms of up to five years. Additional funding may be available for multiple secondary or backyard suites, subject to municipal approval.Newfoundland and LabradorThe Secondary and Basement Suite Incentive Program in Newfoundland and Labrador supports affordable housing by funding homeowners to create new, self-contained rental suites at below-market rates. Eligible homeowners can receive up to 50% of renovation costs, capped at $40,000, as a forgivable loan. This loan doesn’t require repayment if the suite is on the homeowner’s property and rented at NLHC-defined below-market rates for at least five years.AlbertaVarious municipalities in Alberta offer their own incentive programs.CalgaryCalgary’s Secondary Suite Incentive Program, approved in 2023 and operational in 2024, provides financial assistance for the development of new secondary suites. This initiative is a key part of Calgary’s housing strategy. Homeowners are encouraged to apply for the program after securing the necessary building permits and completing a mandatory eLearning course on suite safety and compliance.EdmontonEdmonton’s Secondary Suite Grant Program, operational since 2009, provides grants of up to $20,000 to homeowners for creating or upgrading secondary suites. Cold LakeAs of May 2024, Cold Lake passed its Secondary Suite Development Incentive Program. An incentive of $5,000 is available for either developing a new secondary suite or legalizing an existing one built without permits.These incentive programs, at all levels of government, are subject to change; it is important to stay updated as new ones are introduced or discontinued.
Debt Dynamics and Financial Stability in Canada: Household Debt Service Ratio Trends
Mortgage trends and other household debts continue to raise concerns. According to an Edge Realty Analytics June 2024 report, first-quarter decreases in Canada’s household debt service ratio due to static payment variable rate mortgages could lead to increased financial pressure when these loans renew, while rising household interest payments and a high debt-to-GDP ratio are squeezing discretionary spending, potentially slowing economic growth.High debt levels and rising servicing costs can constrain consumer spending and economic growth. As interest rates continue to rise, the financial stability of households and the broader economy In the first quarter of 2024, the household debt service ratio in Canada saw a slight decrease, ticking down by 7 basis points (bps). This was somewhat unexpected given the rising interest rate environment. The decline was primarily driven by an 18 bps reduction in the principal repayment component of the ratio, even as the interest paid component increased by 11 bps.Source: Edge Realty AnalyticsImpact of Static Payment Variable Rate MortgagesA significant factor behind the lower principal repayment could be the prevalence of static payment variable rate mortgages. These mortgages maintain constant payment amounts by extending the amortization period as interest rates rise. However, when these loans reach their renewal period, they must revert to the original amortization schedule, which could put upward pressure on principal repayments in the coming years, particularly in 2025 and 2026.Rising Interest Payments and Household SpendingHousehold interest payments have surged dramatically, reaching an annualized $170 billion in Q1, up from $90 billion just two years ago. This increase in debt servicing costs significantly reduces the amount of money available for discretionary spending, potentially dampening economic activity.Household Debt Relative to GDPAlthough the household debt-to-GDP ratio slightly declined to 101.6% in Q1 from 102.2% in the previous quarter, it remains concerningly high. This ratio is still well above the peak level observed in the United States in 2009, positioning Canada among the highest in terms of household indebtedness globally.Canada is near the top among major economies regarding total non-financial debt relative to GDP, which includes household, corporate, and government debt. This high level of indebtedness means that the impact of rising interest rates is felt more acutely in the Canadian economy compared to others. Recent data from the Bank for International Settlements (BIS) places Canada firmly in the top ranks of indebted countries, underscoring the vulnerability of the Canadian economy to interest rate hikes.Source: Edge Realty AnalyticsSource: Edge Realty AnalyticsRising Mortgage ArrearsThe latest data from the Bank of Canada highlights a continued increase in mortgage arrears and credit card delinquencies as of the first quarter, though auto loan arrears have decreased. The financial stress is not evenly distributed across Canada. Ontario, British Columbia, and Quebec have experienced above-average increases in consumers missing credit payments, with severe delinquency in mortgage balances exceeding $1 billion in Ontario for the first time.In these provinces, the high costs of home ownership and rent are significant contributors to financial strain. Despite these pressures, mortgage arrears at the national level remain relatively low, reported at 19 basis points (bps), with Ontario and British Columbia at 13 bps and 15 bps, respectively, according to the Canadian Bankers Association.
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