BUDGET DID NOT DO ENOUGH TO ADDRESS MARKET DISTORTIONS

BY CARLA GILES, CHIEF EXECUTIVE OFFICER, CMBA-BC AND MBIBC; CO-EXECUTIVE DIRECTOR CMBA

Home sales in Canada have been rising for two consecutive months, although at a slow pace. Home buyers are adjusting to the current reality of higher interest rates, limited housing supply and home price corrections across the country.

The housing market was one of the sectors most impacted by the Bank of Canada’s aggressive campaign to slow down economic growth and bring the consumer price index (CPI) down. This campaign resulted in a 425 basis points increase to the policy interest rate in less than a year. Despite much uncertainty in the market, these measures were followed by a drop in inflation from a high of 8.1 per cent in June 2022 to 5.2 per cent year over year in February 2023.

The Bank of Canada’s second consecutive hold since March 2022 was a sigh of relief for the housing market, building some confidence in the sector. The Canadian Real Estate Association (CREA) released its March Housing Market forecast indicating that national home sales were up on a month-over-month basis in March 2023 by 1.4 per cent. This is a slight increase, but it comes after three quarters without any significant declines. Overall, CREA seems optimistic that sales activity will pick up in 2024, resuming a long-term trend as indicated by the figure below.

Supply issues are still a concern. CREA revealed that new listings on the market dropped a further 5.8 per cent in March compared to the previous month. Not surprisingly, the sales to new listings ratio increased to 63.5, higher than the long-term average ratio of 55.1.

March also saw the MLS® Home Price Index up by 0.2 per cent on a month-overmonth basis and, according to CREA, “this trend of prices stabilizing from February 2023 to March 2023 was very broad-based. With few exceptions, prices are no longer falling across most of the country.”

The Bank’s quantitative tightening campaign produced undesired impacts to housing affordability as the costs of owner- ship have increased. Many Canadians will continue to be priced out of the market, further accentuating income disparities across its population.

The 2023 federal budget released in March introduced targeted supports to address inflationary impacts to low- and modestincome Canadians, but these effects will be temporary. The federal budget focused on Canada’s fiscal strength and competitiveness, mostly through supporting a transition to a clean economy through tax breaks aimed at driving up green investment.

By leaving housing affordability off the budget, the federal government appears to believe it has done what it can to steer the housing market onto a more affordable path through its 2022 budget measures.

These efforts included boosting housing supply, curbing speculation and supporting first-time home buyers. One such measure led to the introduction of the First Home Savings Account (FHSA), a new registered plan to help first-time home buyers save towards their first home. The tax-free advantage is available for deposits of up to $8,000 per calendar year with a $40,000 lifetime limit (see p.42).

Analysts tend to agree that these measures won’t be effective for some time and won’t be enough to address market distortions and labour shortages that hinder housing supply.

Recent statistics released by CREA show that new listings are at 20-year lows. Housing

March Market Snapshot

supply shortages are nothing new as econo mists and housing market analysts have been vocal about the challenges faced by a combi nation of market factors, including a lack of skilled trades and increased borrowing costs, which are partly due to market factors con tributing to delays in construction projects.

The ever-growing immigration targets the federal government sets are bringing more housing demand to key urban centres. At this pace, immigration will bring added strain on the housing market and further contribute to a deterioration of housing affordability. Ac cording to RBC, “the recent track record for construction has been underwhelming. While home building has picked up in Canada over the past three years – housing completions rose from less than 190,000 units in 2019 to roughly 220,000 units in 2021 and 2022 – it was nowhere near enough to meet supercharged demand.”

How to solve the housing supply crisis is a complex matter. It is best addressed through a systemic approach where multiple stakeholders are brought together to uncover the issues contributing to housing supply shortages. While some solutions can be planned and executed on a broader scale, some will depend on local and regional realities and may require differentiated solutions to address unique situations. For these reasons, a holistic approach that includes multiple stakeholders is necessary.

Source: RBC Thought Leadershipe: https://thoughtleadership.rbc.com/green-shoots-in-canadas-housing-market/