By Julie Gordon

OTTAWA, (Reuters) – The Canadian government’s plans to reduce runaway home prices by quickly increasing the pace of construction could cause an increase in construction costs and oversupply long-term, experts warned.

Justin Trudeau, Prime Minister of Canada’s Liberals, last month announced plans to construct 3.5 million new homes in the coming decade. This is to help keep pace with increasing population and to reduce the shortfall that fuels a real estate boom.

Experts argue that Canada’s housing crisis isn’t as severe as it seems. They note that starts have been at an historic high of around 250,000 per year, with record numbers of units in construction. However, completions are slow.

“I believe that we absolutely need more supply in order to keep up with the increasing household growth that has resulted from immigration. Steve Pomeroy is an Ottawa-based housing policy consultant who believes that the number of 3.5 million people is exaggerated.

It is very risky to try to speed up construction, he said.

Pomeroy explained that increasing house prices would have a negative impact on the supply chain, including labor and land costs.

Canada’s building industry is experiencing alarming levels of stress due to a shortage of skilled workers and retirement crisis. Not to mention the rising cost of lumber as a result of the global supply chain crisis.

It is also common for homebuilding to fall under the authority of municipal and provincial governments. This makes it difficult to create a national strategy.

PRICE RISE

Trudeau was elected in late 2015. Since then, the national home price has more than doubled. The gains are far greater than those of Canada or the United States during the previous 15 years.

Vancouver and Toronto have seen a price increase that has rendered many homes unaffordable. This led to authorities taking steps to reduce the stress. Trudeau announced that the government would ban foreign buyers for two consecutive years.

Ahmed Hussen, Canada’s Housing minister said that Canada has not been able to provide enough housing to match the drastic increase in population in Canada compared with other G7 member countries.

Hussen cited OECD data which showed Canada has fewer housing units per 1,000 inhabitants than the G7. According to Scotiabank estimates, the current shortfall amounts to approximately 1.8 million houses.

Bob Dugan is the chief economist for Canada Mortgage and Housing Corporation. He said that with more people moving to Canada and more households being formed, the construction rate “is barely slipping away” from the gap.

Dugan said to reporters last month that it would take 36 years for the same pace as housing starts. According to some estimates, the actual need for housing is higher than anticipated by Scotiabank at 1.8million.

Critics of this assessment argue that Canada has fewer houses overall due to its higher population per head than the G7. This is due to intergenerational living and young children. Canada is at the same ratio as the United States and United Kingdom in terms of home ownership to the population, although they haven’t seen the same increase in prices.

Doug Porter, BMO Economics chief economist, stated, “Count me skeptical as to just how large a supply shortage there might be, maybe outside of some major centers.”

Oversupply of the market can also be a result from a more intensive construction frenzy. Canadian home prices have not fallen for significant periods since the 1990s. This was after a decade of rapid price growth that led to an unprecedented building boom, and subsequent oversupply.

It is possible that this situation could be repeated if the construction pace increases too fast, with rising interest rates cooling down demand and housing starting at high levels.

Porter stated, “It’s quite, very possible you could end up having oversupply.” Porter stated, “It is quite possible that you could end up with oversupply.” He said that Porter doesn’t get so disturbed by it. However, I don’t dismiss the issue as an immediate concern.