Higher interest rates won’t be enough to ‘cure’ Canadian housing, CIBC says

One of Canada’s leading banks is warning that expectations that rising interest rates will have a real and lasting impact on the Canadian housing market need to be tempered.

In a bulletin this week, CIBC says the Bank of Canada’s rate hikes to date and further hikes planned through the end of 2022 will only “relieve the symptoms” of the turbulent real estate market for a short period.

Instead, CIBC economists have focused on the housing supply issue as the overwhelming structural problem in the nation’s real estate market.

“In fact, if history is any guide, the coming downturn could exacerbate the mismatch between supply and demand in the market,” the bulletin read.

“After years of tackling supply issues with demand-side tools, governments at all levels are finally recognizing that over time the housing affordability crisis will get worse without policies. adequate offer.”

Analysts say there is a gross underestimation of housing demand, as current methodologies and estimates are “based on inaccurate and overly simplistic assumptions”.

The reasons for the demand undercount are as follows: the 2021 household formation projects are based on 2016 data, which underestimates the number of immigrants and non-permanent residents since 2016; expired non-permanent resident visas that are not counted as residents or households; usual place of residence; and undercoverage of the household head rate among recent immigrants and non-permanent residents.

“When looking at housing market mismatch, the variable to focus on to measure housing demand is household formation. And we assume that number is accurately measured and written in stone. After all, municipalities rely heavily on these estimates when making decisions about land release and building permits,” the bulletin read.

“But the household formation figures are far from accurate. They are derived by CMHC by translating population growth into the number of households using estimates of headship rates or the number of households created from a given number of people. However, a lot of information is lost in this translation, which leads to a gross underestimation of the actual number of households in Canada, and therefore of housing demand. And if the demand is underestimated, then, of course, the supply freed up by the municipalities to meet this demand will be insufficient.

Naturally, CIBC’s solution is to get municipal governments to allow a much larger supply of housing to be built.

But the bank is also questioning the country’s ability to build needed housing due to the huge labor shortage in the construction sector, which is made worse by intense competition from major infrastructure projects. for the same limited labor pool.

Although Canada saw record immigration levels in 2021 of more than 400,000 people, almost none of these new residents worked in construction.

“It is clear that to answer the question of housing supply, a the immigration component is necessary. In addition, policies aimed at training young Canadians in the skilled trades would help facilitate labor shortages,” the bulletin adds, noting that it now takes twice as long to build low-rise and high-rise housing today as it did 20 years ago.

In addition, rising labor, material and transportation costs add to housing affordability issues.

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