The Hidden Housing Shortage

Suppressed household formation is a problem for policymakers — even if it’s hard to measure.

Last week, my friend and I submitted some housing policy recommendations to the Government of Prince Edward Island as part of their 2023 budget consultation process. In conducting our research, we found that PEI needs to build at least 1,800 net new dwelling units a year over a ten-year period. Changes to provincial land use and property tax policies are at the centre of our recommendations, but we also identified the need for investment in non-market units, public transit, and programs that attract more construction workers.

Our estimate of 1,800 new homes a year was a direct reflection of PEI’s total housing need, taken from two sources:

1. PEI’s structural housing shortage (3,000+ units): We looked at the total number of households formed and dwellings completed between July 1st 2016 and 2021. To calculate household formation, we multiplied the yearly change in PEI’s adult population by the province’s headship rate (the number of households divided by the total adult population) from the last applicable census. The structural shortage is equal to the difference between the number of households and the number of housing completions.
2. The number of households expected to form over the next decade (15,000+ units): We calculated the expected adult population in 2031 (based on the provincial government’s forecast) and then subtracted the amount identified for the same age range in the 2021 census. We then multiplied the difference by PEI’s 2021 headship rate to get the total number of predicted new households.

The 1,800-unit target is likely a conservative estimate of PEI’s housing need for two reasons. First, actual population growth in the last two years has far exceeded the provincial government’s projection, and is rising faster than Statistics Canada’s high-growth scenario for PEI. The Island’s population exceeded 170,000 people in July 2022 — a milestone that was not expected to be met until late 2023 or early 2024. To better reflect this rapid population growth, the estimate of PEI’s annual housing need would actually be actually closer to 2,100 new units a year.

Adult population growth is about a year ahead of schedule.

The second (and more nuanced) issue surrounds the use of headship rates. In our submission, we only focused on headship rates derived from the 2011, 2016, and 2021 censuses. We applied these rates for 2011–2015 (48.2%), 2016–2020 (49.5%), and 2021-onward (49.4%). But what these rates don’t tell us is how many more households there would be on PEI if they were formed at the same pace of more affordable jurisdictions. The difference between the actual number of households and a counterfactual amount can be interpreted as the total number of suppressed households — a sign of a much more severe housing shortage.

Suppressed household formation is hard to calculate, but it’s the product of an unaffordable housing market. For example, when a couple can’t afford to purchase a house, they may delay starting their own independent household and instead move in with a relative or a roommate. An influx of these sorts of tenants puts pressure on rental markets. If rental units are in short supply, then the result will be higher average rents and the displacement of incumbent tenants and lower-income families. This can cause long-time renters to either take in roommates themselves to reduce shelter costs or leave the rental market altogether. Regions with undersupplied housing markets generally see the most extreme results of suppressed household formation such as homelessness, outmigration, and neighbourhoods with fewer kids.

When crafting a long-term housing supply strategy, suppressed households should be factored in.

While not a perfect indicator of housing affordability, headship rates can identify urban areas that are better at facilitating the formation of independent households. Cities in Atlantic Canada have relatively high headship rates — meaning that moving to your own place from parents or roommates is much more attainable in Moncton than it would be in the Waterloo Region. The issue facing PEI (and especially Charlottetown) is that the Island’s headship rates are among the lowest in the region, and far lower than those observed in Quebec and the Prairies — places that generally have lower rents or home prices relative to income. As a result, comparing PEI’s headship rates to those in a more affordable jurisdiction can potentially identify a more accurate reflection of the Island’s systemic housing needs.

Headship rates are generally higher in Atlantic Canada, Quebec, and the Prairies. Montreal offers a good benchmark when trying to determine how many households are suppressed in other urban areas.

In studying this topic at a national level, Lauster and von Bergmann recommend using the headship rate for Montreal’s census metropolitan area as a benchmark to estimate how many more households a community might have if housing markets were better supplied. But why Montreal? Their reasoning is pretty straight forward:

“Montréal is a big metro area with rental vacancy rates that have remained relatively stable within the 3%-4% range, with high household maintainer rates, if not the highest. So, we’re going to go ahead and use Montréal as our baseline to provide estimates for how household formation might be suppressed elsewhere across Canada. And we’re going to call it The Montréal Method.”

Comparing household formation trends in Charlottetown, Summerside, and the rest of PEI to those in Greater Montreal can be useful for provincial planners and policymakers.

Remembering from earlier that our budget submission applied census-based headship rates to yearly adult population changes, the steps for estimating suppressed household formation on PEI are pretty straightforward:

1. Switch out the PEI headship rates for the ones applying to Montreal’s metro areas.
2. Calculate the total number of households that would’ve been formed on PEI each year using this rate.
3. Subtract the actual number of households formed each year to get annual estimates of suppressed households.

If PEI formed households like Greater Montreal, then the Island would have added an additional 200 households in the period following the 2016 census. Additionally, Montreal’s headship rate grew following the 2021 census, while PEI’s rate fell. As a result, PEI’s total amount of suppressed households in 2021 and 2022 is much higher relative to its structural shortage.

Using Montreal's headship rate, we can estimate how many households were unable to form on PEI (red). This should be added to the province's structural housing shortage (blue).

Household suppression appears to be most pronounced in Charlottetown, but the number of suppressed households in Rural PEI is growing year-over-year. Conversely, the Summerside urban area has a higher headship rate than Montreal, meaning its total number of suppressed households is negative. Summerside’s homeownership and rental markets are significantly more affordable than those in the capital area — even when adjusted for median income.

When all the regional housing needs are totaled, the aggregate amount per year increases slightly from the amount present in the budget submission. This is because population growth, household formation, and dwelling completions are not consistent across urban and rural areas. The revised data are more accurate than our original approach of using a province-wide headship rate to estimate households from PEI’s total change in population. When suppressed households and high population growth are factored into the annual supply need, the amount of units needed per year grows by over 300.

PEI’s current rate of housing construction is insufficient to even maintain pace with the most conservative estimate of annual housing need.

Does that mean that the findings from our week-old budget submission are an obsolete undercount? Absolutely not. The numbers submitted reflect PEI’s existing headship rates and indicate the amount of housing needed to ensure that household suppression doesn’t worsen in the province. At the current pace of dwelling construction, the shortage will increase by between 5,700 and 9,000 units (depending on the selected population growth and headship scenarios). If this gap doesn’t close, PEI’s headship rate will fall by 5%, bringing it closer to levels seen in places like Toronto and Vancouver.

To mitigate this issue, 1,800 net new homes should be the absolute minimum on Prince Edward Island. But the closer PEI gets to 2,200 units a year, the better equipped the province will be to account for added growth and suppressed household formation. The provincial government has an opportunity to fix the housing crisis in partnership with builders, tenants, and other orders of government. Political will is required to make this happen.

All data, including regional breakdowns, can be found here.