Economics 101: Easy fix for Canada’s housing crisis?
By Eric Van Enk on April 27, 2024.
On April 12, the federal government announced a plan to build 3.87 million new homes by 2031. Building 3.87 million new homes in this country over the next seven years equates to an average of ~550,000 housing starts per year. Let’s put this into perspective, 550,000 annual housing starts is more than double the highest number ever recorded in Canada (record was 270,000 housing starts in 2021). Raise your hand if you think doubling the highest housing starts ever recorded might create inflation or other negative unintended consequences. What about the need to construct the additional infrastructure required when you add ~4 million new homes (roads, sewers, power plants, etc.)? I wonder if the federal government has stress-tested their new home building ambitions from the perspective of the amount of labour required to more than double the highest number of housing starts ever recorded? As shown in this week’s chart, almost 8% of Canada’s workforce is already employed in the construction industry, more than any time since 1946. Let’s do some simple math – if the Liberals intend to more than double the highest number of housing starts on record and ~8% of Canadians are currently employed in the construction industry, what do you think the percentage of our workforce employed in construction will need to be to achieve the federal government’s target? Probably not 16% because not all workers currently employed in construction are involved in residential construction or related infrastructure. However, we know it must be a lot higher than the current 8%. Somewhere in the middle (i.e. 12%) might be a reasonable estimate. Where do you suppose these workers will come from, other industries? What will construction companies need to pay people to leave their current job to build homes? How easy will it be to train people in the trades required to build ~4 million homes, who will do the training and what will this cost? What do you think will happen to the cost of labour for other industries (manufacturing, mining, retail, etc.) if workers are leaving those jobs for the construction industry? Will those industries have to pay their employees more to keep them? Does any of this sound like it may be inflationary? What about the cost of building materials, do you think more than doubling the highest housing starts on record may increase the cost of lumber, cement, etc.? Is immigration the answer? Can we entice the required amount of skilled labor from other countries to move to Canada to meet the demands of building twice as many homes per year as have ever been built? Does this become circular logic as each person we bring into the country to build new homes will need a place to live? I thought the federal government was trying to fix the housing crisis by making homes more affordable for Canadians. Increasing the supply of homes is supposed to bring down the cost of housing but not if the cost of building those homes is inflated by higher costs of labour and building materials. The simple solution (building enough homes to balance supply and demand) may not end up being so simple if the Liberals follow their current plan. National Bank Financial – Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA). The information contained herein has been prepared by Eric Van Enk, associate portfolio manager and wealth adviser at NBF. I have prepared this article to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The opinions expressed herein, which represent my informed opinions rather than research analyses, may not reflect the views of NBF. The opinions expressed are based on my analysis and interpretation of historical data. Values and returns will fluctuate, and past performance is not necessarily a guarantee of future performance. The particulars contained herein were obtained from sources I believe to be reliable but are not guaranteed by me and may be incomplete. The opinions expressed are based upon my analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The securities or sectors mentioned herein are not suitable for all types of investors. Please consult your wealth advisor to verify whether the securities or sectors suit your investor’s profile as well as to obtain complete information, including the main risk factors, regarding those securities or sectors. 19-18
