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New Study on Impacts of New Housing Construction

A small, single-story house with a gray roof and beige siding, showcasing the charm of new housing construction. A front porch features two black metal chairs, a table, and potted plants. There are shrubs and a well-maintained lawn in the front yard.

A CMHC study on Evaluating the Impacts of Increasing Housing Supply in Canada was released in March.

According to CMHC’s estimations, an additional 3.5 million housing units would be required by 2030 to restore affordability, surpassing the current construction pace. However, the introduction of new housing options at different price points could affect households with varying socioeconomic backgrounds in disparate ways. The study aimed to identify which types of new constructions could provide the most favourable outcomes overall.

The study used a sorting model calibrated with Canadian data from the Toronto Census Metropolitan Area (CMA) to assess housing dynamics. This model simulates how households make decisions on residence and employment within metropolitan areas.

Increasing housing supply gradually enhances affordability through a process called filtering, which occurs across all market segments. Filtering entails a shift of housing units from relatively higher-income households to relatively lower-income ones over time. This transition occurs as newer, more desirable housing units are acquired by higher-income households, rendering older units more affordable for lower-income households. Consequently, accessibility to housing and affordability improves for those with lower incomes across different price ranges.

As new housing options become available, higher-income households tend to migrate to these new accommodations, vacating their previous units. This creates an opportunity for lower-income households to access housing previously occupied by higher-income groups, thus enhancing affordability and overall welfare for the latter.

Nevertheless, the influx of new housing supply can attract additional households to migrate into the area, stimulating economic activity and demand for services. While this influx contributes to improvements in welfare and amenity provision, it may also aggravate affordability challenges.

The study noted that while all new constructions may enhance housing affordability and benefit low-income households, they may adversely affect high-income households. However, the extent of these impacts depends on the type of construction.

Building only low-cost housing may be effective in enhancing affordability by making housing more accessible to lower-income households. However, this approach often leads to significant out-migration of higher-income households seeking more upscale accommodations. At the same time, it attracts an influx of lower-income households, drawn by the newly affordable housing options. While this strategy improves affordability for some, it can strain local amenities and have impacts on labour as higher-income residents relocate, impacting the overall welfare of the community.

In contrast, focusing solely on middle-cost housing or adopting a mixed approach that includes various price ranges can alleviate the disruptive effects of out-migration and in-migration seen with low-cost housing. However, these strategies might not achieve as substantial improvements in affordability compared to low-cost housing alone. While targeting middle-cost housing options or a combination of different price ranges may offer a more balanced solution, this could result in a trade-off between affordability gains and the extent of housing accessibility for lower-income households. 

Hands holding a set of keys with a plastic keychain shaped like a house, symbolizing the excitement of new housing construction.

The study also simulated a “productivity shock” scenario, where there is a sudden increase in the productivity of households with post-secondary education. This leads to a surge in housing prices, particularly in the affordable housing segments, as demand from higher-income households rises. This demand is driven by a combination of higher-income households moving into the area and lower-income households moving out. Without new housing construction, this influx of demand pushes prices up, leading to gentrification. 

Landlords tend to benefit from productivity shock, due to the considerable increase in house prices.

In the study, four policy options were considered to address productivity shock.

  • Maintain current construction levels: Moderates price increases but doesn’t fully restore affordability.
  • Build enough to stop low-income out-migration: Requires a significant increase in supply but may result in lower-quality housing.
  • Provide new supply at minimal cost: Reduces construction expenses but may disadvantage higher-income households.
  • Maintain the mix of new supply as in 2015: Offsets price hikes but comes with the highest construction costs. 

The study noted that the model scenarios are hypothetical; real-life housing situations are more complicated and nuanced. However, it does provide some added insight into current and future housing solutions and trends.

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