RESCON: Decline in home building will have economic fallout

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The ratio of housing costs to incomes is out of whack. It is now in the range of 11:1 when it should be closer to 4:1

Famed Indian lawyer and ethicist Mahatma Gandhi once remarked that, “The future depends on what you do today.”

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If that is the case, it is imperative that we pull out all the stops to address the housing and affordability crisis. If we don’t, judging by recent homebuilding starts and sales, the residential construction industry and Province of Ontario could be in for tough economic times.

I don’t think many people realize how bad the situation has become. We have the worst level of new home and condo sales in a generation. The bottom has essentially fallen out of the market.

We are presently staring into the abyss. Developers and builders have started laying off employees and trades. Tenders are being delayed or scaled back. Developments have been shelved. I expect there will be more condo project cancellations as the year progresses due to lack of sales.

The new condo market, in particular, has tanked as inventory swells. Housing starts in Toronto fell 40 per cent year-over-year in June. That’s on top of a 41-per-cent year-over-year plunge in January, 68 per cent in February, 65 per cent in March, 25 per cent in April, and 22 per cent in May.

To put a finer point on it, 2,478 new condos were completed and available for purchase in the second quarter in the GTHA – a 102-per-cent increase from a year ago and five times higher than two years ago. There are 60 months of supply for standing inventory on the market.

The situation is looking far worse than in the early 90s. In response to the current market dynamics, developers have been cutting jobs. Preconstruction sales brokerages have laid off staff and myriad business are reducing their headcount. Total layoffs as a result of the decline could range from 200,000 to 300,000 in the new house and condo building industry in Ontario.

The knock-on effects of all this could be catastrophic. Governments stand to lose billions of dollars in taxes, development charges, permit fees and GST and HST from construction activity.

The construction sector contributes seven to eight per cent of Ontario’s GDP, with the residential sector representing a big chunk of that. An 80-per-cent drop in residential construction could easily reduce provincial GDP growth by 1.5 to 2.5 percentage points.

Adding to the problem, many workers who leave the industry may never return, which will be a big problem when homebuilding picks up, as many current workers are near retirement age.

The market has turned because of high construction costs and the fact that taxes, fees, levies and development charges are making new homes too expensive for working families to buy.

The ratio of housing costs to incomes is out of whack. It is now in the range of 11:1 when it should be closer to 4:1.

According to CMHC, we need to build 4.8 million homes across Canada over the next decade to restore affordability. That means 480,000 new housing units are needed per year by 2035.

But with 90,760 housing units recorded through May, we would need to double the current pace.

Governments have taken some action. The feds have scrapped the five-per-cent GST on new homes for first-time buyers and reduced the sales tax for first-time buyers on a sliding scale for homes purchased between $1 and $1.5 million. The Ontario government has indicated it will follow suit and cut the eight-per-cent provincial portion of the HST for first-time homebuyers.

But it’s not enough.

To further spur the market, governments need to get rid of the sales taxes on all new homes – not just for those buying their first home. They also need to get development charges lowered, reduce red tape which only adds to approval timelines, and speed up the approvals process.

Taxes account for 36 per cent of the cost of a new home today, up from 24 per cent in 2012. The increases are crippling the market as the costs are ultimately passed on to the buyers.

A decline in homebuilding will devastate our economy. I recently did some modelling of possible situations, with the assistance of ChatGPT, and came up with some alarming figures.

A 30-per-cent decline in industry activity, for example, would result in 121,500 total job losses, a 50-per-cent drop would result in 202,500, and an 80-per-cent dip would total 324,000.

The entire economy would feel the effects of the employment decline. Industries that supply the new home market with everything from lumber to drywall and windows would be affected. A decline in the construction workforce also translates into hardship for many families.

If any of these scenarios plays out, Ontario’s economy will lose billions of dollars. A report by CivicAction indicates that between 2014 and 2024, more than 500,000 residents left the GTHA due to high housing costs. When you do the math, that alone amounts to a $7.5 billion annual loss in GDP.

Our future depends on the actions we take today There is no time to waste.

Richard Lyall is president of the Residential Construction Council of Ontario (RESCON). He has represented the building industry in Ontario since 1991. Contact him at media@rescon.com.