The Hidden Costs and Construction Challenges Facing Canada’s Housing Market
Canada’s housing market continues to face challenges beyond high home prices and interest rates. For both real estate investors and developers, an environment where construction costs are increasing and hidden regulatory fees – particularly development charges – can impact profitability and add to difficulties. These issues affect the supply of new housing and its affordability, creating a complex situation.In a recent interview, Simeon Papailias, co-founder of REC Canada discussed some of these issues with Phil Soper, CEO of Royal LePage. Carrying Construction Projects: The Financial StrainOne of the most pressing concerns for real estate developers is the challenge of carrying construction projects over extended periods. The time it takes to move a project from concept to completion has grown significantly, particularly in major metropolitan areas like Toronto, Vancouver, and Montreal. High-rise projects often take between seven and ten years to complete, largely due to bureaucratic red tape and regulatory delays.The longer a project takes to complete, the greater the financial burden becomes for developers. Interest rates, which have been rising steadily, increase the carrying costs, making it even harder for developers to maintain profitability. Since developers rely heavily on borrowed funds, they are acutely sensitive to the cost of financing these multi-year projects. When interest rates rise and timelines extend, the financial strain becomes unsustainable, leading to delays or outright cancellations.Development Charges EffectOne major factor that exacerbates these challenges is the burden of development charges—fees imposed by municipal, provincial, and federal governments to cover the costs of infrastructure, parkland, and other public services. Development charges have become a significant, albeit under-discussed, component of housing prices. In some areas, these can be as high as 30%.Development charges represent a substantial upfront cost for developers, adding to the already high financial burden of carrying long-term projects. Unlike labour or material costs, which can fluctuate based on market conditions, development charges are fixed costs that developers must pay regardless of other factors. This makes it difficult to adjust to changing economic conditions or cost pressures. These fees are likely passed on to consumers in the form of higher home prices, making housing even less affordable. The Ripple EffectAs development costs rise—driven by a combination of prolonged timelines, increased carrying costs, and substantial development charges—developers are forced to pass these costs on to buyers. This creates a ripple effect throughout the housing market. Pre-construction projects, which are primarily driven by investors, become less attractive as profit margins shrink. This reduces the pool of capital available for new housing projects, which in turn stifles housing supply.Capital Gains EffectAn additional factor in this reluctance is the recent increase in the capital gains inclusion rate from 50% to 66%, which further eats into investor profits. Without investors, many pre-construction projects simply do not happen, as end-users typically do not purchase homes five years before they are ready to move in.This can create unsustainable conditions for developers: with rising costs and limited investor interest, fewer projects get off the ground, further constraining the already limited housing supply. Policy and tax changes could make a critical difference; stakeholder groups like RESCON are speaking out against policies like development charges. However, it is important for investors and stakeholders to continue to watch changes in these areas.The full interview can be found here.
Canada's Housing Starts Update: September 2024
The housing market in Canada continues to show a mixture of growth and decline across various regions and housing types. Housing Starts Data for August 2024As of September 2024, CMHC reported a decline in the six-month trend in housing starts, which fell 2.9% from 255,794 units in July to 248,480 units in August. The trend measure, calculated as a six-month moving average of the seasonally adjusted annual rate (SAAR) of total housing starts, reflects the overall cooling of the market across Canada.A sharp 22% decrease in the total monthly SAAR for housing starts was seen, dropping from 279,804 units in July to 217,405 units in August. This decline represents a shift in the construction sector, which had been seeing stronger numbers earlier in the year.Urban and Rural TrendsIn Canada’s urban centers—defined as areas with populations of 10,000 or more—housing starts numbers decreased by 24% in August, totalling 199,478 units. This reduction was largely driven by a significant 29% drop in multi-unit urban starts, which fell to 154,290 units. However, there was a small silver lining: single-detached urban housing starts rose by 3% to 45,188 units.For rural areas, the picture is slightly different. The monthly SAAR for rural housing starts was estimated at 17,927 units, reflecting a more stable situation in these less densely populated areas.Year-to-Date PerformanceDespite the recent monthly declines, actual housing starts year-to-date (from January to August 2024) present a more encouraging picture. There have been 149,922 housing starts recorded in Canada’s urban centers, up 5% compared to the same period in 2023, when 143,229 starts were recorded. Regional VarianceNot all regions are experiencing growth. For example, in Ontario and British Columbia, year-to-date housing starts have fallen across all housing types, while year-to-date growth was propelled by increased construction in Alberta, Quebec, and the Atlantic provinces, where both multi-unit and single-detached starts have risen. Notably, Vancouver and Toronto saw decreases in housing starts, with Vancouver down 20% and Toronto down 14% year-to-date, but it is important to recognize also that both cities experienced record-high construction activity in 2023.Key CitiesMontrealMontreal has seen an increase in housing starts, which are up 39% year-to-date compared to 2023. This rebound suggests a recovery from historically low construction activity in the city the previous year.VancouverAccording to CMHC, actual housing starts in Vancouver were down 20% year-to-date as of August 2024 compared to 2023, although, again, it is important to note that 2023 was a record year for construction.Edge Realty’s September Metro Report further reports that the number of dwellings under construction in the metro region rose 0.9% month-over-month in July, reaching 65,000 units in total. However, only 3,700 of these were single-family homes, compared to 21,800 rental units and 39,900 condos. It also reported that housing starts in Vancouver were down 15% year-over-year, with single-family starts dropping by 20%, the lowest tally in the past 30 years, and suggested that the lack of new supply in the single-family market could contribute to long-term housing shortages, particularly as demand remains strong.The focus on condo and rental unit construction in Vancouver reflects a shift in the type of housing being built, but the drop in single-family home starts underscores concerns about future supply constraints.TorontoToronto’s housing market has also experienced significant shifts. According to CMHC, actual housing starts in Toronto were down 14% year-to-date as of August 2024 compared to 2023’s record-high starts.Edge Realty’s September Report adds that construction activity in the GTA rose by 1.1% in July, driven by a 5.5% increase in rental construction. Of the 103,000 dwellings currently under construction across the GTA, 11,000 are single-family homes, 73,000 are condos and 19,000 are rentals. Housing starts were up 6% year-over-year in July, led by rental construction, which saw the highest number of starts in any month since at least 1990.Despite the increase in rental construction, the single-family housing market in Toronto remains in decline. Only 8,300 single-family homes have been started in the past 12 months, a figure approaching 30-year lows. Edge Realty also warned of a significant slowdown in condo starts in the near future, citing an 83% decline in new condo sales from 2021 levels, noting that new condo sales typically lead starts by about 18 months. As a result, the current sales downturn signals a likely reduction in future condo starts. The report also warned of future supply shortages.
Canadian homeowners 75+ more financially stable, well-connected & purpose-driven than 50-somethings
A survey commissioned by HomeEquity Bank shows 95 per cent of Canadian homeowners aged 75 and older are very satisfied or somewhat satisfied with their lives, compared to just 79 per cent of Canadians in their 50s. Study’s happiness markers: Financial stability, quality connections & sense of purpose “Our latest study unpacks different happiness markers for Canadians and how they shift as they age. We found a sharp distinction between those approaching retirement and those well into it,” says Katherine Dudtschak, president and CEO of HomeEquity Bank. The happiness markers used in the study include financial stability, quality connections and sense of purpose. “To be fulfilled, you need to look at all facets of your life,” says Vivianne Gauci, HomeEquity Bank’s senior vice president of customer experience. “Financial stability is a fundamental part of living a healthy and fulfilling life, but it’s not the only factor. Connections and purpose have critical roles to play, which is why enjoying a happy retirement requires a holistic approach.” Here are the study results. Financial stability 48 per cent of Canadians in their 50s feel very good or excellent about their finances, while 68 per cent of those aged 75 and older feel the same. Likewise, more Canadians in the older age bracket (75 per cent) vs the younger age bracket (55 per cent) felt they could handle a major unexpected expense. Quality connections The study found that feeling connected and experiencing good friendships improves as people age from their 50s to 75+ (70 per cent versus 85 per cent). As well, another indicator of connection, living in homes in good order and enjoyed by family members, improves with age (81 per cent versus 89 per cent). Sense of purpose Being active in their communities is more common for those aged 75 and up (48 per cent) than those in their 50s (30 per cent). Likewise, giving back to the community and supporting charitable causes increases with age (34 per cent versus 51 per cent). Biggest stressors For homeowners in their 50s, the biggest stressors include outliving retirement savings, not having enough to support themselves and the ability to leave behind a legacy they can be proud of. This is exacerbated by a changing retirement landscape, which includes Canadians aging with more debt, limited cash savings and shrinking pensions, while living longer with increasing and different health care needs. Review the full report here.
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