A startling report from The Canadian Centre for Policy Alternative reveals that the current level of new housing constructions is significantly lower than that witnessed during the catastrophic economic shutdown at the apex of the COVID-19 pandemic.
The report released last Wednesday reveals a marked decrease in investments across multiple housing sectors since April 2020, the peak of the pandemic-induced economic crisis. Specific figures indicate a 21 per cent fall in investments in new single-family homes, an eight per cent decrease in new row home constructions, and a two per cent reduction in new apartment building initiatives.
The report further elucidates a rather grim scenario when juxtaposed with February 2022, the period when interest rate hikes were initiated. Single-family homes investments have suffered a 36 per cent slump, while semi-detached housing investments experienced a 27 per cent fall. Investment in new row home constructions and apartment buildings show a modest two per cent and a massive 19 per cent decline respectively.
Comparing the current scenario with the first quarter of 2022, it was found that investments in new home constructions have fallen 17 per cent. Renovations and ownership transfer costs have correspondingly decreased by 21 per cent and 28 per cent respectively.
Simultaneously, the report reveals a concerning stagnation in the real GDP growth from January to July 2023, mainly attributable to the considerable dip in residential investments. David Macdonald, responsible for authoring the report, cautiously indicates a continuation of this negative trajectory.
Macdonald cited the Bank of Canada’s estimation that the adverse impacts of rate increases might require two years to significantly impact the housing sector and consequently the economy. With 18 months elapsed since the first rate hikes, Macdonald warns that the worst is yet to materialize, particularly given that most significant rate hikes have occurred over the past year.
The Bank of Canada initially increased interest rates from 0.25 to 0.5 per cent in March 2022, with swift increments over the summer resulting in a 3.25 per cent interest rate by September 2022.
The report highlights a transient uptick in new constructions, particularly in row houses and apartment properties, during the summer of 2022. Unfortunately, declines were noticed across all major housing unit types by the summer’s end.
Notably, the Bank of Canada has implemented a total of ten rate hikes since March 2022, raising the interest rate from near-zero to five per cent, its apex since 2001.
Macdonald advises that in the wake of amplified interest rates, governments must recalibrate their approach to compensate for the dwindling private sector investments in housing construction. Instead of banking on private incentives, Macdonald proposes direct involvement of the federal government in building non-market housing or converting units to non-market rentals.
Constructing or offering 0% mortgage rates to non-profit organizations for building houses are potential long-term solutions. However, the construction process being time-consuming underscores the sense of urgency, with a decade often needed for completion from land acquisition to inhabitance, or five years at best.
The report underscores the profound effect of rising interest rates on housing-related sectors including construction, renovations and homeownership transfer, besides industries reliant on significant loan-backed purchases like vehicles. Furthermore, businesses operating in the housing construction sector often grapple with substantial debt accrued during project completion before its subsequent sale.
