Rising interest rates and a sluggish supply chain pose added complications for new housing development, but industry insiders and economic analysts alike maintain that Canada’s market fundamentals should reward investors in the longer term. Speaking during the Bloomberg online Canadian finance conference last week, commercial real estate players assessed the opportunity and tallied some of the current challenges, while one of Canada’s top housing strategists outlined the federal government’s efforts to invigorate producers and stabilize consumers.

“Correcting the supply-demand imbalance is the best way to restore affordability,” asserted Romy Bowers, president and chief executive officer of Canada Mortgage and Housing Corporation (CMHC). “We need to create more homes for Canadians to buy, but we also need to create more rental units for Canadians to live in across all price points.”

Recent CMHC analysis concludes that approximately 3.5 million additional dwelling units are needed to meet demand and pull prices back into closer alignment with purchasers’ and tenants’ incomes. That underpins a federal target for 400,000 housing starts annually, which is roughly double the current Canada-wide level.

The private sector is tapped for a crucial role in filling that gap, given that it builds 95 per cent of the housing coming onto the market. However, it’s a performance expectation that’s intrinsically tied to development costs, the availability of labour and the receptiveness of the local governments that control planning and permitting.

“Demand is so high, there should be a supply response, but that supply response is not happening,” Bowers mused. “So we have to, really, as a country, look at what is preventing the supply response and take actions urgently to address those issues.”

Encumbrances and counterbalancing efforts

From developers’ perspective, Brian Rosen, president and chief executive officer of Colliers Canada, cited some common encumbrances, including prolonged timelines for obtaining development approvals and development charges and fees that drive up costs. Varying planning requirements, political agendas and staff resources present lesser or greater hurdles across a myriad of urban municipalities, but opposition from local residents and/or politicians is typically universal. And, if the slow process and persistent conflict seems tiresome, so, too, can be the resulting output.

“You end up with a very binary effect — you get a tower or you have a single-family home, but there’s a lot of stuff in between (those two forms) that can be done,” Rosen observed.

Recent, and perhaps future, interest rate increases bring higher costs for borrowed money, changing the break-even point for new projects. For condo developers, that also comes with concerns about consumers’ buying powers.

Bowers confirmed that CMHC’s revised outlook, slated to be released in October, will chart a year-over-year average national decline in house prices in the range of 10 to 15 per cent. That’s steeper than the 5 per cent dip projected earlier this year, but she places it in the context of “rapid, unsustainable price increases” over the course of 2020 and 2021 and contends there’s little fear of a crash.

“We believe there is a very significant supply shortage in Canada and there is significant demand that is being unfulfilled,” she reiterated. “In our view, the supply-demand mismatch is what is going to sustain the housing market in the long term.”

The dynamics are the same in the rental housing market. “There’s a direction multifamily rental rates are headed and it’s not a downward direction, which is tough on people from an affordability standpoint,” Rosen said.

Through its financing arm, Bowers reports CMHC is striving to “keep the construction pipeline going” as inflationary pressures subvert developers’ pro formas and undermine project viability. Meanwhile, to tackle lamented obstacles in the development approvals process, CMHC has been tasked with rolling out the new Housing Accelerator Fund for municipalities — $4 billion over five years, promised in the 2022 federal budget — aimed at spurring the construction of 100,000 new housing units.

“We hope that this incentive will provide municipalities with the support to break down local-level barriers that do exist to supply creation,” Bowers said. “This funding could be used to accelerate permitting processes or to modernize planning processes. It could also be used to educate local residents about the benefits of more density in their communities and more transit-oriented development.”

Prospects for strong investment returns

The latter is the type of project for which investors and developers are enjoying success and foreseeing strong continuing demand. Michael Emory, president and chief executive officer of Allied Properties REIT, sketched out trends in Montreal, Toronto and Vancouver where urban mixed-use development is flourishing.

He suggests the prominent presence of post-secondary institutions and knowledge-based organizations draws a constant supply of young people to Montreal’s core, nurturing spinoff synergies of business start-ups, job growth and demand for housing, retail and leisure pursuits. Along with the noticeable towers — including in-progress, purpose-built rental projects that will deliver thousands of new units as they are completed over the next few years — he sees more subtle “soft densification” augmenting Toronto’s supply, while Vancouver continues to churn out new condo and multifamily rental developments.

“There may be some dampening of creation because of interest rates, and because of perhaps inappropriate behaviour on the part of municipalities, but I think Canada will continue to propel forward because there’s a deep need,” Emory submitted. “Our populations are growing and we do have to find dignified ways of creating living space.”

Rosen concurs that housing is an integral component of what he terms “placemaking” or redeveloping and repositioning areas within the existing urban fabric. He predicts investors will continue to reap strong returns from mixed-use projects that package housing and retail with walkable or easy transit access to residents’ workplaces and other services and amenities.

“That’s where a lot of investment is going to be going — to creating those neighbourhoods where they’re now currently not highest-and-best-use, as well as intensifying and densifying in those areas and transitioning malls and reimagining what retail should look like,” Rosen said. “If you can get in on that, and it may take a multi-year investment, that is a real future growth area for all different types of the asset classes, and that’s where we’re going to see communities thrive.”

Barbara Carss is editor-in-chief of Canadian Property Management.