Housing affordability affects us all. Whether you want to buy your first home, or you’re struggling to pay rent, or you want your children to be able to live in the same area they grew up in – but are currently priced out of – housing affordability affects you.
The federal government has recognized that Canada needs to build 3.5 million additional homes over and above the 2.3 million we would normally build in the next ten years to house Canadians and address affordability. That’s 5.8 million homes. But housing starts are slowing at a time when the opposite is needed to increase housing supply. And the lack of homes available is driving up house and rental prices.
Why are housing starts slowing? Rising and sustained interest rates have had a devastating impact on new homes sales, and as a result, construction has slowed. CHBA’s Housing Market Index, which reflects industry sentiment through sales and sales centre traffic, indicates that builders are building fewer units and cancelling projects, suggests housing starts will begin trending downward even more severely in 2024.
Interest rates and other policy barriers are currently keeping the residential construction industry from being able to double housing starts and correct Canada’s housing shortage. But there are solutions.
The Role of Government
All levels of government have a role to play. Governments should help provide a stable market in which prospective homebuyers have reasonable access to homeownership, and in which those who rent do so because it’s truly their best option based on affordability and preference.
Remember that housing is a continuum, and that ensuring a healthy market for the 4 in 5 Canadian renters who want to buy a home frees up space and resources for Canadians who truly need them. The federal government can play a key role by supporting policies that will improve housing affordability and, in turn, foster an environment conducive to increasing housing supply. If the financial and policy environments change to enable much more production, we will not have enough workers to double housing starts. We also need changes to the immigration system and productivity to make it happen.
Policies that will improve housing affordability and, in turn, increase supply
So what measures can improve housing affordability? Solutions will come in the form of measures to improve housing supply so that demand doesn’t keep driving up prices, which will take federal leadership with a holistic approach. They’ll come from lowering interest rates as soon as possible. They’ll come from smarter mortgage rules that address risks without locking too many Canadians out of homeownership, especially first-time buyers. They’ll come from lowering government-imposed costs that are currently adding to affordability challenges and removing barriers within the home building process that are making it harder to build homes. And they’ll come from supporting the residential construction industry to help keep it building and renovating—from supporting the workforce through immigration and training, to investing in increased productivity in the sector.
At the Canadian Home Builders’ Association, we study how housing in Canada works, and we strive to ensure Canadians have access to the homes that meet their needs at a price they can afford. A healthy housing market is good for this key industry that creates so many jobs, yes. But it’s also good for Canadians, and it’s why we’re passionate.
The following policies can unlock the door to homeownership and improve housing affordability:
1. CONTINUE FEDERAL LEADERSHIP, BUT WITH A HOLISTIC APPROACH – to increase market-rate supply and improve affordability
Canada is short 3.5 million homes.
We need more of the right kind of housing, in the right places. When there isn’t enough supply of the types of homes that people want to buy, house prices go up by too much, and too quickly. The government analysis and goal-setting of doubling housing production to make up the 3.5 million unit housing deficit in the next decade—on top of 2.3 million homes we would normally build in that time—has been very helpful and needs to continue.
The government also needs to ensure its own economic policies do not run counter to efforts to increase housing supply. For example, government action on interest rates, mortgage rules, red tape, taxation, and codes and standards should be viewed holistically, keeping in mind the goal of building more homes. The federal government and its related institutions (Canada Mortgage and Housing Corporation (CMHC), the Bank of Canada, and the Office of the Superintendent of Financial Institutions (OSFI)) should work in close consultation to ensure their collective actions support more housing supply and do not inadvertently stifle growth.
Recommendations:
- Continue the goal of doubling housing production to make up Canada’s housing deficit of 3.5 million homes.
- Ensure the government’s own economic policies do not run counter to efforts to increase housing supply.
- Work in close consultation with related institutions to ensure collective actions support more housing supply and don’t inadvertently stifle growth.
2. REMOVE BARRIERS TO HOMEOWNERSHIP FOR FIRST-TIME BUYERS
There are three factors that determine housing affordability: the person’s income, the mortgage rules in play, and the price of the home. Wages have not kept up with today’s high home prices and interest rates, and first-time buyers are inordinately affected by mortgage rules, especially those to insured mortgages, yet they are the lowest-risk group of buyers. They’re also the financial future of Canada. They’re starting their careers and their salaries are just beginning to grow.
Rising and sustained interest rates and ever-tightening mortgage rules have made access to homeownership for first-time buyers more and more difficult. If they’re not buying homes, it reduces the industry’s ability to build more homes. It doesn’t mean that the demand for more homes has gone down, but rather that it’s been artificially repressed. And when young people and new Canadians who want to own homes can’t move out of rental units, it puts more pressure on the rental market, driving up rental prices. A healthy housing continuum includes robust market rate housing options, and diverse pathways to homeownership, supported by sound mortgage policies.
Mortgage rules have been so tightened that homeownership rates have been falling severely since 2011, especially for people under 30 (Statistics Canada). This has been done in the name of financial sector stability, yet mortgage arrears are at historic lows of 0.17%, well below their long-term average of 0.34% (Canadian Bankers Association), and 5 times less than the current US rates of 0.98%!
The cost of over-tightening mortgage rules has been a severe drop in homeownership rates, with a 2.5% drop since 2011 (likely more by now), equating to 1 million more Canadians now renting instead of owning.
We need to help young people overcome today’s obstacles to homeownership. And since one of the biggest obstacles – high home prices – is caused by a lack of supply, the key issue of housing supply should be considered in all monetary and regulatory policy (e.g. any actions by the Bank of Canada, Finance/CMHC, and OSFI)
First, interest rates must be lowered as soon as possible. CHBA also recommends a return to 30-year amortization periods for first-time buyers for new construction homes. This change would go further to support well-qualified home buyers access to homeownership while strengthening the economy and the Canadian financial system, and it will incent new construction, which we need. By the time their first 5-year term is up, most first-time buyers have a higher salary than when they applied for a mortgage. And most Canadians do not take their entire amortization period to pay off their mortgage (the average 25-year mortgage is actually paid out in much less time – about 18 years). Reintroducing 30-year insured mortgages – not for all buyers, but for well-qualified first-time buyers on new construction homes – will address growing inequities in mortgage access and will deliver financial benefits to younger Canadians and Canada as a whole, in addition to spurring an increase in housing starts.
The mortgage stress test should be modified to reduce the test rate on a declining basis for 7- and 10-year mortgage terms, given the reduction in risk with longer mortgage terms for both Canadians and the financial system. And any future proposed changes to OSFI B20 consultation (for uninsured mortgages) that make it even harder than it is now to buy a home, should take a balanced approach to regulations.
In some markets, homes are much more expensive than others (again, largely linked to a lack of supply). CHBA recommends that the home price limit for insured mortgages in more expensive markets be increased to $1.25 million.
And finally, introduce a renovation tax credit for first-time home buyers so that an existing home can be renovated to fit their needs.
Recommendations:
- Lower interest rates as soon as possible.
- Introduce 30-year amortizations for well-qualified first-time buyers on new construction homes.me buyers.
- Lower the overall stress test and ratchet it down for longer-term (7- and 10-year) mortgages.
- Ensure any future proposed changes to OSFI B20 guidelines (for uninsured mortgages), which make it still harder to buy a home, take a balanced approach to regulation.
- Increase the home price upper limit for insured mortgages in more expensive markets to $1.25 million.
- Introduce a renovation tax credit for first-time buyers.
3. LOWER GOVERNMENT-IMPOSED COSTS THAT ADD TO AFFORDABILITY CHALLENGES
Government taxes and fees are a major contributor to high house prices, making up as much as 31 percent of the sale price of a home in some regions.
The Federal Government can help affordability by lowering the GST on new homes. House prices have increased substantially since the GST was introduced in 1991. The New Housing Price Index, which measures the change in newly constructed house prices over homes, was 56 in 1991. It’s now 125—more than double. It is time to increase the thresholds of the ST/HST New Housing Rebate to reflect the increased price of housing today. When the GST was first introduced, the federal government made a commitment to adjust the New Housing Rebate thresholds every two years to reflect changes in housing prices, and thus to protect affordability over time (see Technical Paper on the GST, 1989, pg.19). However, those thresholds have never changed. They are currently $350,000 for the full rebate, reducing to $0 for anything over $450,000. Since the New Housing Price Index has more than doubled since 1991, the rebate thresholds should therefore be doubled as well, to $700,000 and $900,000. To further help affordability for Canadians who helping achieve Canada’s climate change goals, Net Zero Energy and Net Zero Energy Ready home renovations should be made eligible as “substantial renovations” to qualify for the GST/HST New Housing Rebate.
We need more purpose-built rentals, but the tax system undermines the business model for them. To help, the government should expand the removal of GST on purpose-built rental housing to projects that were not yet substantially complete as of September 14, 2023, and encourage the provinces to follow suit. The government can also provide more and easier-to-access low-cost financing for purpose-built rental to incent developers to invest in this needed rental. In addition, the introduction of a “Rental Retention Vendor Tax Credit” for private owners selling to not-for-profit groups who are reinvesting in new purpose-built rentals would help.
And finally, the government can assist municipalities in lowering their own imposed costs by increasing housing-supportive infrastructure and transit investments (to lower municipal development costs which get passed on to developers and—ultimately—homebuyers), and tie them to housing supply outcomes.
Recommendations:
- Lower the GST on new homes by increasing the thresholds of the GST/HST New Housing Rebate.
- Make Net Zero Energy and Net Zero Energy Ready retrofits eligible as “substantial renovations” to qualify for the GST/HST New Housing Rebate.
- Support Purpose-Built Rentals
- Expand removal of GST on purpose-built rental to projects that were not yet substantially complete as of September 14, 2023, and encourages provinces to follow suit.
- Provide more and easier-to-access low-cost financing for purpose-built rental.
- Introduce a “Rental Retention Vendor Tax Credit” for private owners selling to not-for-profit groups and reinvesting in new purpose-built rental.
- Assist municipalities in lowering their imposed costs by increasing infrastructure and transit investments..
4. REMOVE BARRIERS AND RED TAPE WITHIN THE HOME BUILDING PROCESS
Barriers within the home building process result in delays and building more homes more difficult and costly, which in turn impacts housing affordability and the industry’s ability to build more homes. The government has recognized Canada’s shortage of 3.5 million homes over the next decade, and all levels of government should be trying to remove barriers within the home building process in order to facilitate increasing Canada’s housing stock.
The federal Housing Accelerator Fund (HAF) provides incentive funding to local governments encouraging initiatives aimed at increasing housing supply (e.g addressing inefficiencies in zoning, bylaws, approval/permitting delays, and NIMBYism). The federal government should continue to roll out the HAF to municipalities, and increase its funding to support municipal process improvements tied to housing supply outcomes (e.g. addressing inefficiencies in zoning, bylaws, approval/permitting details, NIMBYism).
The government should also make sure its own actions do not make homes even more difficult to build by fixing unnecessary federal red tape that are making home more expensive and placing an extra unnecessary burden on home builders. It needs to fix the Underused Housing Tax regulations, so that home builders and developers are excluded completely (as are Real Estate Investment trusts and publicly-traded companies). It also needs to fix Forced Labour in Supply Chains Reporting requirements by recognizing the different legal treatment between real property and goods, so that builders/developers are not erroneously caught up in legislation squarely aimed at risks related to manufactured products. And finally, changes should be made to Trust Reporting Requirements so that condo pre-construction deposit trusts are excluded, since the trusts are held by lawyers in accordance with real estate consumer protection laws and the information is already available through FINTRAC.
Recommendations:
- Continue with the roll-out of the Housing Accelerator Fund and increase its funding.
- Fix the Underused Housing Tax regulations to exclude home builders and developers.
- Fix Forced Labour in Supply Chains Reporting Requirements so that builders/developers are not erroneously caught up in the legislation.
- Fix Trust Reporting Requirements so that condo pre-construction trusts are excluded
5. AVOID ADDING COSTS THROUGH CODES AND REGULATIONS
The federal government has policy levers to address climate change and improve affordability in tandem—and it will take smart policy to achieve this. Many new policy directions that put pressures for more stringent codes and regulations (e.g. climate change mitigation, resiliency, accessibility and others) are very important, but expensive.
While there is an important role that housing can play it is important to ensure that addressing climate change does not exacerbate housing affordability challenges along the continuum, driving homeownership further out of reach for more individuals and families, and reducing the number of social housing units that can be built.
Unfortunately, almost all short-term actions to address climate change policy priorities through regulation increase costs to housing. It is critical to innovate and find solutions to these challenges without driving up housing costs. CHBA is actively driving innovation within the sector. We’re engaged in the pursuit of affordable solutions through our CHBA Net Zero Energy Home Labelling Program, which has labelled over 1700 homes, as well as through many other areas, such as climate change adaptation.
In addition, it’s important to recognize that today’s new homes are already very efficient (and will continue to become even more efficient). But to address climate change within the sector, it’s critical to address the existing housing stock through energy retrofits during home renovations. CHBA’s Net Zero Home Labelling Program includes renovations to address this need.
It is important to invest in R&D to find energy efficiency measures that do not reduce affordability. The government should focus on neutral-cost innovation to bring down costs and scale up use first, before regulating excessively high levels of energy performance. CHBA cautions against adding excessive costs through code and/or regulation that will impact housing affordability in Canada, at a time when home is more important than ever. Better solutions can be and should be found first to improve affordability for consumers, not make it worse.
CHBA recommends having the EnerGuide Rating System (ERS) label on all houses at the time of resale to raise the energy literacy of Canadians, help home valuations truly reflect energy efficiency, and further encourage Canadians to make energy efficiency and retrofit investments on an accelerated pace in ways they can afford. Consistency and clarity can help homeowners tackle climate change.
Recommendations:
- Invest in innovation and R&D for lower- or neutral-cost solutions that promote energy efficiency, climate adaptation and resiliency, accessibility and health and safety. Before regulating in these areas, cost-neutral innovations are required.
- Adopt affordability as a core objective of the National Building Code and all related standards to ensure that we are building better, more efficient houses for the same price or less moving forward.
- Work with the provinces to have the EnerGuide Rating System (ERS) labels on all homes at time of resale.
6. ADDRESS LABOUR SHORTAGES
Canada doesn’t have enough workers to double housing starts, which is what is needed to build an additional 3.5 million homes over the next ten years, in addition to the 2.3 million homes that would typically be built in that time frame. If the financial and policy environments change to enable much more production, we will not have enough workers to double housing starts.
However, the construction industry continues to face chronic labour and skills shortages. BuildForce Canada outlines how an aging labour work force and the expected retirement of some 22% of the labour force in the coming decade, equating to approximately 128,000 workers.
The immigration systems needs to be updated to proactively attract much-needed skilled workers specifically for residential construction. We need to further enhance the trades category-based selection for Express Entry to support the specifics of the residential construction sector, including bringing in TEERs 4&5 construction assistants and labourers. The Temporary Foreign Worker Program must be modernized to facilitate better use by the residential construction sector (with pre-arrival language/safety training and better pathways to permanent residency). And it would be very helpful to invest in employer-based concierges, such as that proposed by CHBA, to liaise with non-profit organizations, individuals and employers to ramp up labour capacity in the sector. Many homebuilding businesses are small with few employees, and lack the capacity to navigate complicated immigration/TFW processes.
The government should do everything possible to encourage more Canadians to consider a careers in the skilled trades, and support the apprenticeship system to help interested go through the training needed for these skilled careers. There is significant opportunity to encourage groups traditionally underrepresented in the current construction labour force, including women, Indigenous people, and new Canadians. As a country, we need leadership to demonstrate these are good and valued jobs, and we need to support the people who work in them. The Canadian Home Builders’ Association is doing its part to promote the skilled trades and provide information to those looking to begin a career in residential construction. Visit our website for more information.
Recommendations:
- Update the immigration system to proactively attract much-needed skilled workers in residential construction.
- Enhance Express-Entry to support the specific of the residential construction sector
- Modernize the Temporary Foreign Worker Program to facilitate better use
- Invest in employer-based concierges
- Encourage more Canadians to consider a career in the skilled trades.
- Support the apprenticeship system.
7. SUPPORT INCREASED PRODUCTIVITY
In addition to addressing labour shortages, increasing productivity in the industry is one of the necessary solutions. Moving the industry towards factory-built construction offers many benefits, but there are risks and barriers that have prevented the industry from transitioning to factory-built construction.
The site-built housing industry has evolved to successfully weather boom and bust cycles of the market/economy. Conversely, factory-built construction requires high capital investment, high overhead, a steady workforce, and steady demand/throughput, which means it’s not inherently well suited to boom and bust cycles. Costly up-front capital needed to invest in modular and other factory-built technologies means it’s a solution that requires government support in order to be widely adopted. Just as the federal government is supporting innovation in clean energy, so too should it invest in necessary solutions to help alleviate Canada’s chronic housing shortage.
The Canadian Home Builders’ Association recognized the critical role of increased productivity within the sector. We have developed a Sector Transition Strategy to explain the current situation, the challenges and opportunities, and provide recommendations to get Canada using more factory-built construction.
Recommendations:
- Support CHBA’s Sector Transition Strategy and its recommended actions to support more factory-built homes as a means of further improving the residential construction industry’s productivity. The Strategy contains recommendations in these four areas:
- Financial system, regulatory and policy support from all levels of government
- Targeted programming
- Strategy financing
- Investment tax credits
Next Steps
Housing affordability and housing supply are intrinsically tied, and both are complex issues, but as you can see, there are tangible things the federal government can do to improve the challenges that Canadians are facing.
And while there is a lot of information out there on how affordability works, not all of it is accurate. Check out our continually expanding Myths and FAQs page to see how much you know about housing affordability in Canada.