PBO says Ottawa's 'costly' affordable housing will be $89 billion

The Canadian Press / Adrian Wyld

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According to Canada's Parliamentary Budget Officer (PBO), rising construction costs for Ottawa's affordable housing initiatives will increase the bill paid by taxpayers in 2022/23.

While the federal government budgeted $82 billion to cover its national housing strategy, the PBO said $89 billion would be needed to bring affordable housing units to Canadians.

"While federal spending to provide affordable housing and address homelessness has increased, so too has the cost of residential construction, reducing the real purchasing power of federal spending," said PBO economists Carleigh Busby and Lisa Barkova in the report.

The federal strategy is mainly administered by the national housing agency, Canada Mortgage and Housing Corp. (CMHC), whose responsibilities have since expanded from its primary role of providing taxpayer-funded mortgage insurance.

Justin Trudeau's Liberal government launched its national housing strategy in 2017 to run a 10-year plan at $40 billion. However, their budget has more than doubled owing to an "accelerated" need for affordable housing — despite construction failing to keep up with the rising demand.

Growing costs for materials, loans and land have pushed up the price tag for new residential development. A shortage of construction workers has also added to overall building expenses, making it much more expensive for developers to build, especially apartment buildings and affordable units.

"Unlike some other industries, the building industry has a fixed capacity to construct more housing, and it is losing many of its older and more experienced workers who are retiring," said Ted Kesik, professor of building science at the University of Toronto, in a written statement. 

"Not enough new people are entering the workforce to offset those leaving, so the workforce is a significant factor."

The Royal Bank of Canada echoed concerns about labour in its 2021 report, Powering Up: Preparing Canada's skilled trades for a post-pandemic economy, stating that approximately 700,000 skilled tradespeople are expected to retire by 2028.

The PBO attributes "an outdated perception of the trades" for detracting recruitment efforts as Canada looks to contend with its growing labour shortage in construction.

According to BuildForce, a national industry-led organization that provides resources to assist the construction sector, remedying the skilled trade shortage alone may take another three years.

"BuildForce Canada projects that these market challenges could persist through the forecast period due to strong residential construction markets and a growing inventory of current and proposed major projects that are not expected to wane until 2026," a report published on its website last year said.

In June, the CMHC said the country would need 3.5 million more housing units by 2031 to improve affordability. That would require housing to double from an annual average of around 200,000 units to nearly 400,000.

At the same time, an influx of newcomers to the country has increased competition for housing and has driven up rental rates. However, Ottawa claimed that immigration is "crucial for the economy" and accounts for as much as 90% of labour force growth in Canada. 

Follow-up research unveiled in October found that there will only be enough labour to increase the number of builds in four significant provinces — Ontario, Québec, British Columbia and Alberta — by 30% to 50%.

Policymakers are under pressure to deal with the growing unaffordability problem, as record-breaking immigration levels leave the path to prosperity uncertain, with 6.9% inflation and pricey accommodation.

Over the past year, factors spooking Canadian home buyers have rapidly risen Canadian mortgage rates, brought about by Bank of Canada rate hikes and soaring prime rates that jumped from 2.45% at the start of 2022 to 6.45% as of December 2022. 

The federal government wants to welcome upwards of 500,000 immigrants annually by 2025, per their immigration plan. It calls for the admission of 1.45 million more new permanent residents over the next three years, equivalent to 3.8% of the country's population.

BMO's chief economist Douglas Porter expects increased competition among newcomers to push prices higher for affordable housing, with borrowing costs less of a factor moving forward. 

With Canada's housing market continuing to feel the effect of rate hikes and slowing demand, sales nationwide in November 2022 fell 39% year-over-year to 30,135 transactions. 

The federal government wants to welcome upwards of 500,000 immigrants annually by 2025, per their immigration plan. It calls for the admission of 1.45 million more new permanent residents over the next three years, equivalent to 3.8% of the country's population.

Although the feds claim that higher immigration quotas would increase real estate activity in residential areas, especially in Ontario, British Columbia, Quebec, and Alberta, one economist said rising borrowing costs would not immediately create a new pool of homebuyers.

After launching the housing strategy in 2017 amid the real estate frenzy in Toronto and Vancouver, about a quarter of newcomers from January 2022 through October intend to settle in the Toronto region — among the most expensive real estate markets nationwide.

According to the PBO report, the national housing strategy does not have a standard definition of affordability, raising questions on whether constructing units presented as affordable are indeed affordable.

Meanwhile, higher interest rates have made it harder for would-be buyers to qualify for a mortgage. That has led prospective buyers to stay in their rentals and reduced the number of units available. 

In 2022, Canada observed its lowest apartment vacancy rate (1.9%) in over two decades.