CMHC Report Highlights the Importance of Supply to Making Housing Affordable Again
By: Diana Petramala
February 23, 2018
In case you missed it, The Canada Mortgage and Housing Corporation (CMHC) released a massive research report on the drivers of home price growth in Canada’s five largest metropolitan areas between 2010 and 2016. In the 200-page report, CMHC analysts provided a deep dive into the academic research available on housing markets around the world, as well as offering a model-driven approach to analyzing home price movements in Montreal, Toronto, Edmonton, Calgary and Vancouver. The overarching conclusion of the report was similar to CUR’s own findings over the years– that supply constraints accounted for an important component of the rise in home prices between 2010 and 2016.
Home prices can rise for many reasons, including lower mortgage rates, income and population growth and a shift in the age structure of your population. CMHC found that these demand-side factors accounted for most of home price growth across Canada, with the exception of Toronto. They estimate that less than half of the 40% gain in real average home prices between 2010 and 2016 can be attributed to economic factors in the GTA. A lesser 5% is attributed to speculation and domestic and foreign investment. The rest comes from geographic and regulatory constraints. Geographic constraints refer to the amount of land that can be developed in a region, while regulatory constraints include the red tape and costs builders face in the development stage.
In a less constrained environment, Toronto could have had 18,000 to 30,000 more units built between 2010 and 2016
In an unconstrained supply market, rising home prices should encourage more homebuilding activity. Supply constrained markets are ones that typically do not see a big enough rise in new home construction along with market activity. In other words, supply does not keep up with demand.
In their report, CMHC estimated how supply responds to price pressures in the five metro areas studied. Housing starts (the key measure of new supply) in Montreal, Calgary and Edmonton rise 1% to 2% for every 1% increase in home prices. However, for every 1% home price growth in Toronto and Vancouver, housing starts only grow by 0.5% and 0.3%, respectively.
We can put that in perspective by calculating just how much supply Toronto could have had, given similar supply responses in the other three major metro areas studied. Between 2010 and 2016, home prices in the GTA grew by 40% and housing starts averaged about 37,000 units per year. Had construction activity responded as it does in Montreal, Edmonton and Calgary, housing starts in Toronto would have averaged between 40K and 42K per year during that time. Over the six-year period, that would have added up to an additional 18K to 30K homes.
CMHC estimates of new home supply elasticities (chart taken directly from report):