One of the country’s most infamous housing bears tackles the housing markets in Vancouver and Toronto, and investigates whether supply is truly an issue.
“The most egregious bubble in housing in Canada, perhaps in the world, is in the Greater Vancouver area. And a lack of supply there often gets the blame for unaffordable house prices, along with the foreign investor demand,” Hilliard MacBeth, portfolio manager with Richardson GMP and author of When the Bubble Bursts: Surviving the Canadian Real Estate Crash
, wrote in his latest housing analysis. “One theme that keeps getting repeated is that there’s no room to build new housing. But the numbers don’t fit that story.”
To support his argument, MacBeth cites CMHC’s latest housing start report.
From January until August of this year, Vancouver’s market has seen 19,006 housing starts. That’s up 39% from 2015’s total for that time period of 13,717.
“Vancouver housing starts are at record high level … to put (the number of starts) in perspective, if those starts are high-rise apartments at 200 units per tower (8 units per floor and 25 floors), the current pace of construction would result in 95 new buildings in Vancouver,” MacBeth wrote.
And Toronto’s market is performing at an even more aggressive clip.
From January to August, Toronto has seen 26,526 starts – which has kept pace with 2015’s total.
Using MacBeth’s chosen averages, that would result in 130 total buildings in the Big Smoke.
“It doesn’t look likely that supply is the problem (in Toronto either),” MacBeth wrote. “Most of the new construction is in multi-family, which includes purpose-built rentals and condos for sale.”
According to MacBeth, one way to determine whether the level of starts is appropriate is to compare it to starts in the United States.
“If we adjust for the population difference between Canada and U.S. we would adjust the U.S. starts to a ratio 36 million/320 million or 0.11. This gives a Canadian target range of 264,000 to 45,000 to match U.S. building activity,” MacBeth wrote. “So Canada’s construction pace of between 180,000 and 200,000 for several years is at the high end of the range, if it is comparable to the U.S. In fact it is possible that Canada has been overbuilding housing.”
Finally, MacBeth compares supply to residential investment as a percent of GDP of the Canadian economy. It’s here that he raises the spectre of a housing correction.
“Compared to Canada’s past the pace of investment has never been this high,” he wrote. “Canada has consistently invested a bit more than the U.S. but the last ten years the spread is unusually large.
“When investment levels have been this high in Canada and the U.S. in the past, in the periods of 1976-79 and 1988-90 in Canada, shortly after the peak there’s been a significant drop in investment, bottoming around 4 percent of GDP in Canada and 2.5 percent in the U.S.”
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