Laurent Benoit
Housing shortage – causes and solutions
The housing shortage is a crucial issue in Quebec in 2022. According to a Mainstreet Research survey, 84% of Quebecers consider access to housing and home ownership to be a major problem.1 Housing is also responsible for a large portion of household expenses. According to Statistics Quebec, in 2017, Quebec households allocated an average of 20% of their income to housing.2 All politicians and government officials agree that there is a lack of housing in Quebec. The Canada Mortgage and Housing Corporation (CMHC) considers that the equilibrium rate of the real estate market is 3%. That is to say that to be in equilibrium (no shortage, no surplus), it is desirable that 3% of the dwellings be vacant at a given time. These dwellings can be in renovation, in transition between two tenants, etc. In several regions of Quebec, the vacancy rate is well below the equilibrium rate. In Granby, Drummondville, Marieville and Rimouski, the vacancy rates are between 0.1 and 0.2%. In Trois-Rivières, Sherbrooke, Sainte-Adèle, Alma, Joliette, Rivière-du-Loup and Victoriaville, the vacancy rate is about 1%. In Montreal, it is about 3%, but the vacant units are not affordable for the majority of the population. So we clearly have a housing shortage in Quebec. The question that remains to be answered is why? Why do we have a housing shortage in Quebec? The problem is complex and its causes are just as complex. The lack of new construction, demographic changes and rent control will be studied as three important causes of the housing shortage in Quebec.
First, it is obvious that there is a lack of new construction in Quebec. According to the CMHC, in order to reach an acceptable level of affordability, 620,000 housing units would have to be added in Quebec by 2030.3 To achieve this, it would be necessary to double annual housing starts, which represents a major challenge since the construction sector is plagued by a lack of manpower. Another issue is that the process for accepting new real estate development projects is long and complex. The delays are very long and the process is arduous, which adds an additional cost to developers. Also, since zoning laws are very strict in Quebec, one must wonder where the 620,000 additional housing units proposed by CMHC can be built. Population densification can be considered in order to limit the amount of land needed for new construction. Construction productivity must also be greatly improved. Digitization and automation has allowed workers in many industries to be much more efficient in recent years. The construction sector is lagging in Quebec. According to a study by HEC Montreal, productivity in construction from 2000 to 2010 increased by only 0.49% annually. At this rate of productivity gains, the construction sector is one of the worst performers in our economy.4 The fragmentation of workers into different compartmentalized trades (electricians, carpenters, plumbers, etc.) makes productivity gains difficult to achieve since workers cannot offer employers any flexibility. All of these factors mean that Quebec’s housing production capacity is below market demand, which creates pressure on the market. Second, for several decades, Quebec has been experiencing major demographic changes that have a direct impact on the housing market. According to Statistics Canada, in 2016, one-person households became the most common household type (28%) for the first time in Canada’s 150-year history.5 In 2021, 29% of households will be one-person households, while in 1941 it was only 6%! In 2021, 4.4 million people lived alone in Canada, compared.
to 1.7 million in 1981. This change of habit obviously has an impact on the demand for housing since even if the population did not increase, more housing would be needed. The aging of the population is one reason why more people than before are living alone. In fact, 42% of people aged 85 and over live alone compared to 7% of those aged 20 to 24. This is an important variable to consider when talking about housing shortages. People are living longer and most of the time want to keep their housing. The proportion of people aged 35 to 44 who live alone has increased from 5% in 1981 to 10% in 2021. In spite of all that has been said in the last year about the indecent price of housing, we must not forget that if more and more people live alone, perhaps housing is not so unaffordable as that in Quebec. Third, rent control in Quebec has an impact on access to housing. In Quebec, a landlord cannot increase the rent of a unit as much as he or she wants. The Rental Administration Tribunal (RAT) establishes an annual increase recommendation which is typically between 1 and 2%. If the landlord’s proposed increase is higher, the tenant can challenge the increase before the TAL. Between 2012 and 2020, the TAL awarded an average increase of less than 2% in challenges. So what’s the problem? How does this relate to the housing shortage? To answer that, consider good old supply and demand economic theory. It was established earlier that the supply of housing in Quebec was not keeping up with the growing demand. So the equilibrium point would have to move to the right and upwards on the graph below to find the new equilibrium point. However, since it is impossible for prices to go up, it is inevitable that a shortage situation will arise since the quantity demanded is greater than what the market is willing to supply. It seems obvious to me that if our liter of gasoline always cost $1, there would be a shortage for a long time because demand would be much greater than supply. Since price is a tool used to balance supply and demand, it is dangerous to undermine its power in a crucial market like housing. The gap between controlled rent prices and their actual value also creates a significant problem: “renovations. Since landlords cannot raise their rent when a tenant remains in the unit, many landlords decide to evict their tenants so that they can rent apartments at market rates. This practice rightly creates a lot of discontent among tenant groups as they lose their units. The following graphs show the basic equilibrium point (Q*), the theoretical equilibrium point if there were no limit on prices (Q1) and the shortage points (Qo and QD). Qo is the quantity that the market is willing to offer at the price ceiling and QD is the quantity demanded at the price ceiling. The difference between the two represents the shortage.
Figure 1: normal balance, new balance without price control and shortage with price control
In order to achieve a sustainable solution for housing in Quebec, all of these aspects must be addressed. Improve supply, calm the rise in demand and reduce the economic inefficiency created by rent controls. To achieve this, the government must do everything possible to reduce the difficulties of obtaining building permits and minimize administrative barriers. Municipal governments must work hard to identify new land on which to build and densify the population. It will be impossible to address the housing shortage without encouraging private sector investors to build housing. It will also be important to invest in technology development to improve productivity in the construction sector and to review our highly compartmentalized system of construction occupations. Improved productivity will reduce construction costs and thus improve the supply of housing. We also need to review the system of rent controls to allow the market to balance out and avoid discrepancies between perceived prices and the actual value of rents. To help people with low incomes, rental subsidies could be increased. This will change the habits of tenants and will have the impact that the housing market will respond more efficiently to demand. In addition, the number of “renovations” will be reduced as investors will no longer be able to take advantage of the system’s major inefficiencies.
References
https://www.journaldequebec.com/2022/08/26/une-crise-du-logement-tres-importante-selon-les-quebecois 2
https://statistique.quebec.ca/fr/document/depenses-moyennes-des-menages-et-coefficients-budgetaires-selon-le-poste-de-depenses-classification-a-3-niveaux-73-categories/tableau/coefficients-budgetaires-des-menages-selon-le-poste-de-depenses-ensemble-des-menages-quebec-2010-2017-73-categories 3
https://www.lapresse.ca/affaires/marche-immobilier/2022-06-23/abordabilite-du-logement/il-faut-doubler-le-nombre-de-mises-en-chantier-par-annee.php 4
https://www1.fccq.ca/wp-content/uploads/2017/08/FCCQIndusConst2014V1.pdf 5 https://www150.statcan.gc.ca/n1/daily-quotidien/220713/dq220713a-fra.htm