August 16, 2023

We know what we need to do for housing affordability—we just need to do it  

Early in 2023, a chart from the BCA’s Quarterly Snapshot sparked a conversation about housing affordability in Alberta. And what needs to happen to improve it.

The chart compared the supply of housing to the demand for housing, and the gap was alarming. Demand outstripped supply by at least 2 to 1. In other words, for every two new households moving to the province, just one new home was being built. Anyone with a basic understanding of supply and demand knows what will happen as a result: prices are going to rise. 

In fact, this chart, and the imbalance it revealed, gave credence to individual experiences in the market:  buyers bidding tens of thousands of dollars over asking price, renters reporting new leases of $200 or more higher than their previous lease, and international students unable to find housing altogether. These are odd things to see as the Bank of Canada increases interest rates and the market cools elsewhere in Canada. 

More recently, we updated this chart to find that this was not just a one-time outlier but potentially a longer-term trend. The imbalance between supply and demand remains as stark as before. Specifically, our estimates suggest that as of the most recent quarter, there were around 22k new households in Alberta but less than 8k new homes being built. 

Forward-looking measures are not encouraging either. On the demand side, the population will continue to grow. With the federal government’s increase in targets for new permanent residents, international migration to Alberta will only increase. Migration from elsewhere across Canada is expected to persist as well, especially if the labour market remains strong. 

Meanwhile, on the supply side, there are no signs that home-building activity is heating up. Housing starts (i.e., the number of new homes on which construction began) was just 8,000 in the second quarter of this year. Building permits—an indicator of future home building activity—have not jumped markedly either and remain a far cry from their historical highs of 2013 and 2014.  

With these trends set to continue, prices will rise further, eroding the very quality that has attracted many individuals to Alberta in the first place.   

It is worth noting that the imbalance is not felt evenly province-wide. In Calgary, the housing market is especially strained. Calgary’s population grew a remarkable 3.2% in 2022 (compared with 2.5% in Edmonton) and, though official data is not yet available, likely saw similarly high growth in 2023. Not surprisingly, Calgary’s housing inventory (i.e., the number of houses available for sale) is extremely low, as new households have gobbled up what was available. As a result, prices in the city have grown the most of any major city in Canada since interest rates began to rise.  

Given high demand and growing prices, it is surprising to not see more homes being built. A couple of headwinds may be keeping a lid on the industry’s response currently: high interest rates and constructions costs, both of which make it more expensive for builders to develop a lot into a home or homes, and labour shortages in construction which limit the number of shovels in the ground.  

But, more broadly, there are ongoing constraints that assure builders—even with plentiful labour and financing—will not be able to keep pace with demand. Zoning and land-use restrictions, building codes, and other regulations, on top of the wait time to obtain a permit, place constraints on what can be built and how fast. To be sure, these issues are not unique to Alberta. But, as the province’s population continues to grow at a record pace, anything that limits a swift response by industry will become a problem for Albertans.  

Governments are responding to the issues but are doing little that will move the dial. The province recently announced an additional round of funding to provide more “innovative and sustainable” housing options for low-income Albertans. Together with local levels of government, the province has also called on the federal government to distribute support for affordable housing more equally across Canada. As for the federal government, beyond its National Housing Strategy (a strategy that largely focuses on these affordable housing programs for low-income Canadians), it has said that housing “isn’t a primary federal responsibility.” 

While support to build more housing options for low-income individuals is essential in the near time, it misses the forest for the trees, longer term. Increasing government-funded affordable housing units while ignoring the overall market problem is like fixing the damage done by potholes but not bothering to actually fill in the pothole. If the broader market challenge goes unaddressed, it could make for a vicious cycle where a growing number of people require affordable housing as the overall housing market becomes less and less affordable. In other words, housing options beyond the government-supported segment of the market would move further out of reach, leaving more people requiring affordable housing indefinitely.  

More problematic, some of the solutions that have been put forth (e.g., rent control, financial support for home buyers) will exacerbate the problem. They will modestly and temporarily improve affordability. But, without building any more housing, it won’t take long before that just drives prices higher, creating the “need” for more demand-side intervention. 

Turning back to econ 101, it is no secret what needs to happen: we need to build more housing. The supply of housing (“housing stock”) needs to grow in tandem with demand. Otherwise, prices will continue to soar further out of reach.   

It is also no secret how to make this happen: we need to support the private market to build more housing. The proof is in the pudding. For instance, a recent municipal comparison found Cochrane remains $40,000 more affordable than Okotoks. Why? Because it issued double the number of residential building permits as Okotoks. In other words, in Cochrane, the market was able to respond to demand.  

There are a variety of ways to ensure greater growth in the housing stock across the province—from adjustments to zoning and land use regulations to lessening of taxes and fees associated with residential construction. But now is not the time for a piecemeal approach or finger-pointing at other levels of government. Or for being hamstrung by people who perpetually stymie the development of neighborhoods and communities. Now is the time for collaboration and action. 

Alberta’s population is growing, and this is a good thing. But more is needed to plan for this growth. The housing market is clearly out of balance, and there are no signs that this is changing or will change. Municipalities in Alberta should not risk being the next Toronto or Vancouver of Canada. Instead, we should work to be a true leader in affordability, to ensure that housing affordability is a part of our value proposition for generations to come. 

Alicia Planincic, Economist & Manager of Policy

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