Canadian government’s housing plan doesn’t make sense and ‘won’t happen’: BMO

Canada’s latest budget sets ambitious targets for housing supply, but it’s mostly hot air. BMO broke down the federal government’s new procurement measures for capital markets clients this morning. If possible, the 2022 budget plan to double home construction shows they still don’t understand inflation. Or Millennials, think about it. Although that doesn’t matter, since the plan is so bad there’s virtually no chance of it going anywhere.

Canada’s Impossible Housing Proposal Makes No Sense

Canada’s ambitious plan is not based on logic and does not appear to have examined the data. It’s like someone with no experience doing no research, then working backwards to justify a plan.

“Canada’s 2022 budget bet it all on housing, including a very ambitious (maybe high? Impossible?) target to double the rate of housing construction over the next decade,” wrote economist Robert Kavcic. Principal at BMO.

He included a chart to show “how extreme” this published goal is.

Canadian Housing Completions Forecast

The number of new homes completed and the Canadian federal government’s 2022 budget plans for housing completions.

Source: Canada Mortgage and Housing Corporation; Haver Analytics; BMO.

The plan gives the impression that the current level of supply is microscopic, although it is not. The Canadian economy already spends $1 in 10 of its economic output on building homes alone. This is much higher than the United States at the peak of its bubble in 2006, and Canada wants to double dedicated production. Some might say it is unwise to double down on housing in a bubble.

“Canadian completions are already at the highest level since the 1970s, and may be hitting that milestone soon given that there are 340,000 units (a record) under construction,” Kavcic said.

Canada’s Federal Housing Plan Will Not Happen

The prominent economist warns the public not to get too excited because the plan will not come to fruition. “Dollars to donuts, that’s not going to happen, and it’s not for lack of good intentions,” he said.

He shared three main reasons why this strategy is nearly impossible.

  • The Canadian construction industry is operating at full capacity. Skilled labor and materials have already become scarce. He argues that Canada cannot suddenly double its production. If this were possible, it would lead to significant inflation. Rising house prices aren’t the goal, are they?
  • Dramatic zoning change projects are “easier said than done”. He warns that a political setback would be present, which is logical. A federal government is not elected to plan municipalities, and that would be an abuse of power.
  • Demographic demand is expected to peak in the next few years. Millennials are approaching their peak demand years, when demand slows down. The second half of the plan, if possible, would be to build houses for no one.

The famous economist has repeatedly expressed that he is sensitive to the need for more supply. However, he criticized a similar plan in Ontario as merely pandering to what voters want to hear. He argues that it is a problem of excess demand spurred by low interest rates, pointing to the part of highly indebted investors.