The Bank of Canada (BoC) has raised its benchmark overnight lending rates by another 0.25% to 5%, the highest level since 2001, in a continued battle to bring down inflation to the BoC target rate of 2%, currently noted at 3.4%. The recent pause in interest rate hikes over the last few months prior to last week’s hike was in response to the decline in the inflation rate from the 8.1% peak of last fall, but home sales have been relatively strong in the last few months, despite low inventories of both new and resale housing. This low inventory and continued demand have coupled to maintain and even increase the price of available housing. So, in the eyes of the BoC we “have not felt enough pain” yet.
THE COST OF MONEY
Rate and inflation are anticipated to decline in the first quarter of 2024, but this is at least one quarter later than anticipated previously. The effects of the new rate will impact on many levels, not the least of which is the homebuyer.
Those who are subject to variable rate mortgages will feel the impact to a greater extent, as will holders of lines of credit and credit cards, and if banks adjust their lending rates the confidence and or the opportunity for potential purchasers to participate in the housing market will continue to erode.
In the current market, borrowers are leaning toward shorter terms and longer amortizations, with less than 15% of new mortgages over 5-year terms and less than 20% variable. One good indicator up to now has been that mortgage defaults are at a historically low rate.
Clearly, the cost of money will be an inhibiting factor for purchasers, but it will also have a direct impact on the viability of projects in for approvals or still on the drawing boards for our members. The cost of monies, when coupled with lengthy approval timelines and a continuing increase in government charges required to be carried through the life of a project, can turn projects across all scales from viable to financially unfeasible.
CMHC recently released a report that conclusively ties approval delays and higher residential land use regulation to lower affordability with the Land Use and Regulation Index pointing to Vancouver and Toronto having the highest index scores and the lowest affordability by an order of magnitude when compared to other municipalities or regions across the country.
INFLATION HAMPERING HOUSING STARTS
These higher borrowing costs also push through to construction financing, with inflation hitting the construction sector hard. RBC has published a report that speaks of rising costs hampering the ability of the industry to meet the need to deliver more housing. Key findings are:
- Canada’s residential construction price index has soared 51% since the start of the pandemic, putting new pressure on home prices amid a severe housing affordability crisis.
- A shortage of workers (particularly in the skilled trades), a stagnant supply of raw materials and increased input costs have all contributed to price growth.
- Development charges have also spiked alongside higher materials costs and increases in expected population growth.
- More housing starts are required to deliver a badly needed expansion in housing supply. But these will boost demand for materials, which will put upward pressure on costs once again.
As noted in the RBC report, delays in badly needed housing due to the escalating costs driven by higher borrowing costs, increasing material costs, spiking labour costs and overall shortages, coupled with lower purchaser confidence and borrowing ability are reflecting a sharply lower level in starts. BIV is reporting that building permits issued in May 2023 were down by over 45% from this period last year.
This downward trend is reflected in the BC Housing New Homes Registry Report for June 2023, released last week. Total home registrations were down 34% from June 2022, and registrations were down 5.2% from May 2023. Please link through to this report for a breakdown by housing genre and region.
The current problem lies in the fact that, despite the recognized impact of insufficient supply on housing affordability and the consensus among all stakeholders to boost housing construction, we are witnessing a decline in housing starts while demand remains high. This circumstance will only serve to exasperate the housing challenges we have been facing for so long now.
ADVOCATING AT THE NATIONAL LEVEL
In addressing the higher interest rate environment, CHBA National is working to advocate at the federal level to change policies that could help to support and expand housing starts.
- The first point is to support first-time buyers with a 30-year amortization on insured mortgages and relax the stress test to encourage a higher level of qualification.
- The second point is to update and modify GST rebate thresholds which have simply not kept pace with the increase in housing costs. Set in 1991, the thresholds of $350K – $450K are way overdue for an adjustment, and a GST policy to support purpose-built rentals for which there is currently no rebate, is also recommended, as it is a clear impediment to building more of this much need housing.
- The third major point would be more federal investment into housing to enable infrastructure in the way of roads, sewer, and water services, and provision of utilities to accelerate more development and offset the huge order of development charges being levied on new home construction. Government-imposed charges in Vancouver have been identified as representing up to 30% of the end price of housing. Last week the Township of Langley introduced increased DCCs that will reflect an 83% increase in charges, while other municipalities have adopted similar increases.
Per Kevin Lee, CHBA National CEO: “It will take a comprehensive approach to solve Canada’s housing supply and affordability crisis; an approach that supports new homebuyers’ ability to access the market, enables investment in purpose-built rental, avoids adding new costs to housing of all types, and removes barriers to more housing supply that is desperately needed,”
It is imperative that industry strives to change the policies that affect our ability to deliver the housing that we need to bring our market back into balance. We need to advocate for these policies at every level and we cannot miss any opportunity to provide comment, and or push back to advocate for a fair and manageable policy approach that does not choke off opportunity while trying to address other factors in the equation.
HAVAN continues to work with CHBA BC and CHBA to advocate for all levels of government to work together to address the challenges of the housing industry including zoning restrictions, density limits, and NIMBYism.
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QUICK BITES …
- Speaking to the need to support purpose-built rentals, CIBC comments on the need to address GST/HST on purpose-built rentals.
- Noted in Burnaby Now, a 6-story project built on publically held lands in the Edmonds Town Center area that would deliver 122 actually affordable rental housing units and 32 daycare spaces is being opposed by residents as a “monstrosity of a six-story building” that will be like a “skyscraper” in a neighbourhood of three and four-story buildings
- The Vancouver Sun discusses the rethinking of the need for public hearings and whether carrying on the status quo supports democracy or slows down the provision of much-needed housing by giving a platform to strident NIMBY-ism per the previous quick bite.
- Per the comments on infrastructure funding, the Western Investor notes how BC Hydro is not keeping pace with current development, let alone the heightened pace required. There are many projects being delayed or impeded by the lack of this critical infrastructure.