Greetings, Hamilton Real Estate Investor!
I’m so grateful for more normalcy and the world opening up again even if it means less folks are interested in learning about how to invest in real estate or stocks lol.
For all you driven, ambitious types out there, I know you’ll be back this fall because while pandemic restrictions have changed, the fundamentals of our market that drive real estate are still in play.
One of the most universally accepted rules of economics is the law of supply and demand.
This essentially means that if the supply of any particular product is higher than the demand for that product, the price will fall. However, on the other hand, if the supply of that product is lower than the demand created by people who would like to buy it, the prices will begin to rise.
Once the demand becomes high enough, prices begin to skyrocket beyond what was previously considered affordable.
This works the same way in real estate as it does in traditional finance.
Currently, one of the most common explanations you will receive if you ask a Canadian realtor why housing prices have risen so dramatically in recent years, they will tell you there is a housing shortage.
This means that for the last few years, the amount now new housing being introduced to the market has been significantly less than the demand for new homes created by Canadian homebuyers and investors.
So, the question is how far behind the demand is Canada’s housing supply? And why has it not caught up with the demand yet?
What Causes a Housing Shortage?
Housing shortages are caused by a wide variety of factors, each contributing to a larger overall problem. So, in order to understand how Canada has fallen behind on housing, let’s take a look at the causes of a housing shortage.
Homeowners are Afraid to Sell
Most people believe housing shortages are exclusively caused by a lack of new properties being built. However, they are also caused when older properties are not coming back onto the market for new owners to purchase, but why are they not being sold?
To put it simply, many current homeowners who may want to sell their homes and buy something new, regardless of whether they are upsizing or downsizing, are afraid to sell their houses. As housing prices rise and supply begins to dwindle, these individuals are worried that they will not be able to buy something new after they sell, regardless of the rapid appreciation they are experiencing on their properties.
This is a major problem because due to their concerns about a housing shortage, they are accidentally contributing to the shortage itself by choosing not to sell.
Not Enough Construction
Of course, property owners becoming hesitant to sell will not cause a housing shortage all by itself. One of the key causes of a housing shortage is a general lack of new construction. After all, as Canada’s population continues to grow, the demand for new homes will rise accordingly. However, this demand is not being met.
It is currently estimated that over the next three years, Canada’s population is set to welcome over 1.3 million new immigrants into the country. Currently, there are no mass construction projects scheduled for those three years announced that would be capable of meeting the demand during that time.
In a study published by Statista, as of January 2022, Canadians built approximately 670,000 new residential units in a three-year period. At that level, the amount of new construction would only cover approximately half of the anticipated newcomer population. This does not account for the growing domestic population.
Low Interest Rates and Higher Mortgage Debt
Finally, over recent years Canada has experienced record-low interest rates for Canadians who have been looking to buy property. This allowed individuals to qualify for larger mortgages and bid higher against the limited supply of properties available. This not only caused prices to rise but allowed more Canadians to qualify for mortgages and attempt to enter the market, further increasing the demand for houses in the country.
This increase in mortgage loan approval and the higher average loan sizes that were experienced by Canadians have also resulted in Canadians owing more in collective mortgage debt. As of the third quarter of 2021, it was estimated that Canadians owed a total of $2.15 trillion in mortgages. This is an increase of over $1 trillion when compared to a decade prior.
This increase in debt has contributed to rising inflation as people seek relief as well as the rise in housing prices.
How to Combat a Housing Shortage
Canada’s housing situation is frequently a hot-ticket item whenever election season rolls around. With representatives from each party proposing their own solutions on the federal and provincial level. These ideas frequently include strategies such as:
Repairing and Preserving Old Homes
One of the proposed solutions by the majority of Canada’s political parties is the introduction of new incentives for property owners to repair and preserve the current housing supply. Across the country, there are tens of thousands of homes that currently are unoccupied because they are no longer habitable.
By potentially offering tax breaks and new financing streams for property owners to restore and repair these homes, officials hope that these properties will be able to return onto the market and increase the overall housing supply.
Incentivising New Home Construction
Another common strategy that is discussed is the creation of new incentives for builders to increase the number of new homes built each year. These incentives may vary between reduced rezoning costs and higher tax rebates.
By reducing the rezoning costs that builders would have to pay, the hope would be that old, empty office buildings and commercial spaces could more freely be converted into new apartments and condos. Meanwhile, the discussion around tax rebates has largely focused on new constructions, more specifically there has been a strong focus on building single-family homes.
Don’t Be Discouraged
The housing market is constantly shifting, and even when supply is low, new properties are still coming onto the market all the time. So do not let yourself get discouraged.
Regardless of whether you are buying your own home or are looking for your next big investment, it is important to keep your eye on the market for properties that suit your needs.
As always, before you buy anything, make sure you do your research.
In the meantime, if you would like to continue learning with us, you can sign up for our newsletter below.
Happy Investing, Everyone.