Canada has a real estate “supply and demand crisis” that is likely to get worse in the coming years with ineffectual government intervention and central bank policies and not-in-my-backyard movements stymying development, said Aaron Pittman, senior vice-president and head of Canadian institutional investments at Equiton, during the Canadian Investment Review’s 2023 Defined Benefit Investment Forum in December.

On the demand side, the federal government has committed to welcoming close to 1.5 million new permanent residents over the next three years, in part to bolster the workforce as one in five working-age Canadians are set to reach the retirement age in the next decade. Despite being the second largest country in the world by land mass, there are relatively few places that people want to live. Nine in 10 Canadians live within 100 miles of the U.S. border and more than 80 per cent live in urban environments.

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Canada ranks last among G7 countries in terms of housing supply per capita, at 424 units per 1,000 residents, noted Pittman. The country would need 1.8 million additional dwellings just to reach the G7 average and according to the Canada Mortgage and Housing Corp., it will need an additional 3.5 million housing units by 2030 to restore affordability. Over the past 50 years, Canada has only built roughly 200,000 new homes per year.

NIMBY voters have also been very effective at stalling out high-density residential construction. The result is skyrocketing housing prices that have not only stoked real estate investment and speculation, but also made homeownership increasingly unaffordable across the country. Data from the National Bank found in Toronto, 86.8 per cent of the median income would go toward servicing the median mortgage cost and, in Vancouver, 99.7 per cent of the median income would go toward the median mortgage. In comparison, lenders and the CMHC believe debt service ratios should be no higher than 44 per cent.

Housing unaffordability has had a knock-on effect on the rental market, with national vacancy rates below two per cent and the average monthly rental cost for a one-bedroom dwelling now slightly more than $1,900. While the federal government has introduced a vacant home tax, as have cities like Toronto, Vancouver, Ottawa and the province of British Columbia, Pittman said based on 2021 estimates, there are just 1.3 million vacant properties across Canada and he believes the tax would only bring a fraction of a percentage of them back into supply.

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The Canadian Mortgage Charter in the federal government’s 2023 fall economic statement asks banks to proactively work with Canadians who are struggling with high mortgage rates. This has led banks to increase amortization periods, something that Pittman called a “moral hazard” that fails to guard against risk.

The Bank of Canada’s series of rate hikes have helped to slow the housing market and slightly reduce prices. But the picture is complicated by the BoC’s need to stay in near lockstep with the U.S. Federal Reserve or risk damaging the value of the Canadian dollar, he said. Economists are expecting the Bank of Canada to cut rates by roughly 150 basis points in 2024.

Pittman believes the result of decreasing affordability will be a “generational move” to the multi-family segment, given the “huge proportion” of the Canadian population for whom single-family homes will be inaccessible. For investors, the private multi-family sector has numerous benefits, including inflation hedging given real estate’s tendency to appreciate during inflationary periods, low volatility and low correlation with other asset classes. As well, on the capital preservation side, private Canadian apartments “haven’t seen a negative calendar year” since the inception of the benchmark 35 years ago and the average annualized return is just shy of 10 per cent.

Read more coverage of the 2023 Defined Benefit Investment Forum.