In a surprising turn of events, Canada finds itself in the throes of a housing crisis, with new construction hitting a historic low. The pandemic may have dealt a heavy blow to economies worldwide, but even in the face of an astronomical need for housing, the situation in Canada is growing dire. A recent study by the Canadian Centre for Policy Alternatives (CCPA) has shed light on the alarming state of affairs, pointing the finger at the Bank of Canada’s multi-year campaign of raising interest rates to combat inflation.
A Housing Market in Peril
David Macdonald, the author behind the CCPA report, described the impact of the Bank of Canada’s rate hikes as “breathtaking.” This financial strategy, meant to curb inflation, has had devastating consequences on the housing market. The comparisons are striking: new single-family homes have seen a staggering decline of 21 percent, while new row homes are down by eight percent, and new apartment construction has plummeted by two percent.
Even when measured against February 2022, when the rate hikes began, the numbers are deeply concerning, with investment in single-family homes down by a staggering 36 percent.
Macdonald underscores that the most severe impacts of these rate increases may not be fully realized for up to two years, making the current situation a mere precursor to even more challenging times ahead. The overnight rate, now at five percent, allows further increases if necessary.
An Unprecedented Impact
The ripple effect of these higher interest rates is most acutely felt in sectors closely tied to housing, such as construction, renovations, and homeownership transfers. These activities often require substantial loans, and significant debts burden businesses in the housing construction industry.
Builders in the private residential construction sector now grapple with uncertainty, unsure whether they can successfully sell newly constructed units. Construction expenses eat into their profit margins, adding to their woes. Despite government initiatives like the Housing Accelerator Fund and other incentives to bolster private-sector construction, the effectiveness of these measures is waning.
Macdonald aptly compares the situation, stating, “It’s as if governments are bringing a nail to the construction site, but the Bank of Canada is bringing a wrecking ball.”
Shifting Government Focus
Macdonald’s report emphasizes the need for a fundamental shift in government strategy. Rather than relying solely on the private sector, it is time for governments to take a more direct role in the housing market. “This isn’t a time for more private incentives,” he writes, “it’s time to get your hands dirty.”
Among the suggested solutions are initiatives like directly building non-market housing, offering zero percent mortgages to non-profit providers, and converting for-profit apartments into non-market buildings with lower rent. Additionally, governments can consider enforcing rent controls, implementing transfer taxes on investment properties, and imposing mortgage restrictions for investors.
Macdonald concludes his report with a compelling call to action: “Governments at all levels have been shouting about the housing crisis and the need to build new housing supply, but their solutions are stuck in an era when the private sector was building homes. It’s time for governments to take direct and ambitious action in the housing sector—to get back into the housing game and stop relying on the private sector.”
The Ongoing Challenge
The housing crisis in Canada is far from over, with rising interest rates casting a long shadow over the market. It remains to be seen whether the government will heed the call for more direct intervention to alleviate the housing shortage. The fate of many Canadians looking for affordable housing now hangs in the balance, and the solution may require a radical departure from current policies.
