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Originally Posted by Winnipegger
Can someone with more knowledge than me please explain the economics of building multi-family dwellings in Winnipeg and why they seem to take so long and many projects mired in financial problems?
There are so many factors about the housing market in Canada and Winnipeg that I just don't understand how we can have a financially sustainable future for both developers and households. We know that:
1. Construction costs for housing are near all-time highs due to the lingering effects of supply chain issues brought about by COVID and a structural labour/trades supply issue that WILL NOT BE RESOLVED anytime soon;
2. Financing costs are also at recent highs due to recent hikes in interest rates. Barring (another) massive global crisis of some sort, I cannot see sizeable reductions (beyond 25bps) in interest rates within the next year or two;
3. At the same time, shelter costs (rent or owning) as a share of disposable household income is also near all time highs. I understand higher construction and financing costs will drive developers to ask higher rents which households will absorb because we all need a roof over our head. But the flip side is there is less disposable income left for everything else like food, clothing, transportation, and travel. So rents that are raised to offset construction and financing costs will lead to other parts of the economy to slow, which would lead to reduced wage growth;
4. Strong immigration, which is in part necessary to offset the aging population and declining birth rates, will continue to put pressure on housing demand but again, higher rents leave less of the consumption pie left over for every other sector;
5. Canadian and Manitoban households are among the most indebted in the western world, with debt to income ratios of about 160%. We just don't have a whole lot more room to leverage up, and increasing debt payments as a share of income means less to spend on everything else.
6. The higher period of inflation last year means real average wages have declined since 2020.
So what gives? What will the solution be? Developers can't afford to build housing at current construction and financing costs without raising rents, but rents can't move up too much since households face inflationary pressures on every front and are highly indebted already. Yet immigration must continue to prevent a shrinking labour force, and these people need a place to live too.
I just don't see how this is going to be a win for anyone, landlord or renter. Landlords can't afford to build without raising rents, and households can't afford much more rent without eating into other essential parts of their budget which will eventually slow the economy. Canada is in a very tough spot right now and the solutions (more housing supply at modest rents) are not really feasible.
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If the goal is more housing supply at modest rents...
The short answer is that relying on a financialized, highly speculative, profit-driven market will only ever be a disaster. We live in a house of cards.
We have to grapple with the fact that housing people is not necessarily good business, but nonetheless people believe they have the right to housing. How do we square the circle?
The state apparatus long ago abdicated its responsibility to house people, but the current trajectory will only make the situation worse. As aggregate demand drops and we enter a recession, there needs to be big, big public works spending to restart growth, and housing seems like the obvious target.
"We're all Keynesians in the foxhole"...