Why Is Overbuilding Threatening Our Small Towns?

The housing boom, immigration, and low interest rates drive construction, and architects warn that there is a risk of overbuilding in small towns. Some economists believe that supply actually keeps up with demand while others warn of the prospects of overbuilding. The question is whether there is a ceiling to hit for construction to slow down across Canada.

Risks of Overbuilding

While overbuilding is a concern in some Canadian cities, real estate prices in Vancouver and Toronto are sky-high. This means that customers who buy on credit pay a lot in interest charges when buying $1-million homes. While banks offer mortgage loans, a down payment of 20 percent is a sum that few can afford, and many turn to non-traditional or subprime lenders in Ontario. In small towns and large cities alike, overbuilding could become a problem in case of recession and a subsequent drop in household income. Then many borrowers will find themselves in the position of being unable to cover their monthly payments to keep their homes. Home affordability is a concern if one of two scenarios occurs – a prolonged recession or rising interest rates. In particular, borrowers who have variable-rate loans would be affected by interest rate hikes because payments increase when the interest rate goes up. Those who purchased overpriced homes will be the ones affected the most. Low-income households are also threatened by the prospect of rising rates and a further drop in income. Canadian household debt has already hit new record this year. This can be explained by the new lending rate cuts that drive spending and borrowing; see bank fees. At the same time, house prices grow faster than household income, and it makes more sense to rent a home than to own. Overbuilding in the small cities could become a problem because of lower demand compared to hot markets such as Toronto, Calgary, and Vancouver. While baby boomers move to smaller cities once they retire, immigrants and young professionals settle in large Canadian cities in search of high-paid jobs and better standard of living.

Condo Overbuilding, Prospects and Housing Market Trends

In general, whether there is a risk of overbuilding depends on the financing available. Financing is easier to find for some markets and more difficult for others. According to the Bank of Canada and other sources, British Columbia, Calgary, and Alberta, Ontario are hot markets, which can lead to significant household imbalances. Condo overbuilding is another source of concern. Developers have been warned by the CMHC to sell condominiums before building more, especially in cities like Regina, Saskatoon, and Montreal. In small towns, overbuilding may lead to adjustments in housing prices in a downward direction. A drop in real estate prices in turn would eat into net household worth and drive consumer spending down. This will affect job creation and income levels unless housing price corrections are gradual.