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Everyone has heard of the law of supply and demand. If you have a large supply of a particular product and a small demand for people looking to buy it, the price will go down. However, if you have very little of the product and everyone wants it, the price will skyrocket. The same is true for real estate.
If you ask, the majority of Canadian realtors will tell you there is currently a housing shortage. For the last few years, the housing market in Canada has been unable to keep up with the supply and demand needs set forth by Canadians and out-of-country investors. But, how far behind the demand is the housing supply and why has it not caught up yet?
Before we dive into the question of supply and demand, click the link below to discuss your financing options so that you can have the best chance to buy despite the current state of supply and demand in Canada.
What Causes a Housing Shortage? (Understanding Supply and Demand)
Unfortunately, there is no single answer as to why a housing shortage happens. Instead, it is caused by a variety of supply and demand factors piling on top of each other such as:
Not Enough Construction
Obviously one of the biggest factors in a housing shortage is going to be the rate at which new supply comes onto the market. With Canada’s rapidly growing population, the need for new homes to be built is constantly growing.
It is currently estimated that over the next three years, Canada will welcome approximately 1.3 million immigrants into the country. (That is an estimate of over 400,000 new residents each year.) However, there are currently no mass construction plans to build that many homes in the same amount of time. This means the ratio of supply and demand is imbalanced.
According to a study from Statista, in the last three years, Canada built over 670,000 homes. That level of construction only covers half of the expected newcomer population and fails to meet the needs of the current population of Canada while they continue fighting in bidding wars over the nation’s home supply.
Low Interest Rates
Recent years have been marked with notably low interest rates for Canadians looking to buy property. This allows Canadians to qualify for larger mortgages, giving them more room to continue bidding against the limited supply, thus driving up prices. Additionally, it allowed Canadians who may not have qualified for a mortgage to qualify and enter the market, increasing the active demand for homeownership and driving up prices.
This increase in mortgage approval and the higher average loan size has also resulted in Canadians collectively owing more in mortgage debt. In the third quarter of 2021, Canadians owed a total of $2.15 trillion in mortgages, an increase of over $1 trillion from the previous decade. This increase in debt has driven inflation and caused a consistent rise in property prices.
People Are Afraid to Sell
With the rise in housing prices, many people are afraid to sell their homes. They are concerned that regardless of the profit they can make off their homes appreciating rapidly, they may find themselves unable to buy a new home as a result of the low supply. Ironically, this contributes to the low supply because in addition to the insufficient number of new homes available for purchase, there are also fewer old properties being sold.
It is hard to balance supply and demand when people refuse to sell their supply.
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Why Simply Building New Homes Will Not Solve the Problem (Supply and Demand Struggles)
Surely a supply shortage should be easily solved by increasing the number of new homes available on the market. Wrong. One of the key issues facing the Canadian housing market are the types of new homes being introduced.
A large number of the homes being built are apartment buildings and condominiums – creating an increased number of available units in a single area but doing so in a way that prioritizes investors and higher-income households. This does very little to help lower income families enter the housing market and instead creates more opportunities for those families to rent instead of purchase property.
These new buildings are also often built to replace single-family homes within cities in order to combat urban sprawl. This has had a noticeable impact on the market for those single-family properties as the supply for that type of housing is quickly replaced and made unavailable.
Supply and demand can only do so much when the market demands affordable properties and investors want value.
How Can the Government Combat the Price Increase?
One of the primary issues debated during the last federal election was affordable housing and how to combat the rapid rise in the cost of home ownership. Each party brought forward their own ideas as to how to solve this housing crisis including:
Incentivising New Construction
One of the most common strategies discussed was the idea to incentives builders to increase their production of new homes. Some of this was proposed in the form of converting empty offices and commercial real estate into residential units. However, one of the main pushes was for builders to prioritize single-family units to balance the current supply and demand problem.
These incentives were proposed in the form of tax rebates, and government funding streams directed towards construction companies that introduce new single-family homes onto the market, with a large emphasis being put onto the introduction of social housing and strategies to combat homelessness.
Preservation and Repair
Another one of the proposed solutions to increase supply and lower home costs was to incentivise and invest into the repair and preservation of the current housing supply. In cities across the country, there are tens of thousands of homes that are currently inhospitable and sitting in disrepair. By providing incentives for property owners to restore these units, those properties can return onto the market and combat the housing crisis.
Buying in Today’s Market
While efforts to combat the current housing crisis are currently ongoing, it will take years for housing prices to change accordingly. In fact, industry experts expect to see continued growth for years to come, making right now the best time to buy.
In order to secure funding to buy a home in today’s market, you need a mortgage from an experienced lender who understands what you need. Fortunately, LendCity works with a wide variety of lenders to help you find the funding you need for your next purchase. To start the mortgage process today, visit LendCity.ca and fill out the online application. Alternatively, click the link below to book a free strategy call today.