According to a new analysis, the housing market in Canada had the biggest drop in affordability in 41 years during Q2 2022. The markets in 10 Canadian metropolitan centres were examined by National Bank Financial Markets back in August.
The mortgage payment as a percentage of income (MPPI), which compares monthly mortgage payments on an average home to typical incomes, was used by National Bank economists to determine affordability.
The problem is affecting different areas in Canada differently. While affordability is improving in many areas across Canada, some metropolitan areas like Vancouver and Toronto are still seeing hugely inflated real estate prices with no signs of major improvement.
Keep reading to see details on affordability in Canada, as well as a breakdown of how the housing crisis is expected to evolve and how the government and the BoC are addressing the issue.
Affordability has fluctuated wildly in Canada over the years. Since the Bank of Canada began tracking the housing affordability index in 1983, there have been significant peaks and lows. The housing affordability index has recently soared to levels not seen since the 1990s, indicating a severe lack of affordability in the market. Conversely, the new housing price index has soared recently to levels not seen since right before the 2008 global financial crisis. This seems to corroborate reports of a housing bubble that many experts fear could lead to a catastrophic collapse.
Still, with real estate prices beginning to fall in many areas, there seems to be some relief in sight. The downturn in housing costs since February can be attributed to the Bank of Canada raising their rates, leading to less demand for monthly mortgage payments in many markets across Canada.
Canada is a diverse nation both culturally and geographically. Accordingly, there are many different real estate markets across Canada that are affected differently as the Canadian affordable housing markets evolve. In areas like Victoria and Vancouver, British Columbia, some of the most important variables affecting housing affordability include other housing-related expenses, property taxes, inflation, and the shortage of housing supply, which is being made worse by delays in the construction of new homes. Some of these elements are still present in places like Edmonton, Alberta, where housing affordability issues are being linked to residential development delays, out-of-province purchasers driving up demand and home prices, and rising interest rates.
According to data from the Canada Mortgage and Housing Corporation, shelter cost as a share of disposable income for average homes across Canada reached 60% of the median income in 2021. This presents a significant problem due to rising food prices and other expenses. In short, the average Canadian family would have to devote an unrealistic portion of their household income just to afford housing. This is exacerbated by rising costs and the depreciating value of Canadian dollars in the wake of rampant inflation. The Bank of Canada is addressing the inflation issue by rising interest rates, but it might not be drastic enough to curb the large inflation numbers that are hitting Canadians in every sector. Housing affordability is intimately tied to affordability across many sectors.
One of the main issues behind the affordability crisis is the supply gap. There simply are not enough homes available to accommodate the ever-increasing demand for homes. This issue affects every type of home, not just new construction. That being said, the supply gap is not as drastic across every single Canadian real estate market. The vast majority of the gap is centered on Canada's most densely populated areas — Vancouver and Toronto. This may not come as a surprise to those paying attention to real estate prices in various metropolitan markets. Although prices have been falling since February in many areas of Canada, they have remained relatively high in places like Vancouver, Toronto, and Montreal.
Housing supply is expected to increase in 2030, but not by enough to make homes affordable. If current trends continue, Ontario's housing supply-to-population ratio will be decreasing. This is concerning because a sizable chunk of Canada's population lives in this area. In Ontario, a lot more housing stock is required. The main forces behind the supply deficit per province are complex. For each province, recent reports have set a separate affordability target for 2030, taking into account their historical disposable income levels. The highest is for Ontario and would require 1.85 million new homes. To restore housing affordability, experts predict that Canada will require an additional 3.5 million units. However, this number may change depending on how wages and cost of living evolve over the next few years.
In 2018, policy responses to the affordability crisis were identified as challenging. Reports indicated a growing demand for housing and a lack of housing supplies in a number of major Canadian cities. Estimating how much more housing is needed for affordable real estate by 2030 is an essential first step. Between 2021 and 2030 the housing supply will grow from 2.3 to 2.5 million units, with totals expected to reach nearly 19 million homes. Conversely, demand is expected to continue outpacing supply, as immigration into the country continues at record highs. While representatives from various parties acknowledge the need to address the housing issue, most of their proposed policies are based on increasing supply.
Increasing rental inventory and curbing ownership demand could help achieve housing affordability. This would create favourable conditions in which families can better afford accommodation. Allowing families to choose a home they are looking for and that they can afford is essential. This would also discourage households from extending their budgets for homes priced on limited supply and high demand. There are other options to increase housing availability — Increasing the proportion of intergenerational households could also alleviate demand. Rethinking Canada's strategy for increasing the housing supply is necessary. It must be carried out differently. Governments and the housing industry must undergo a radical makeover, with a focus on boosting housing supply and curbing demand.
The 2022 budget from the Government of Canada includes a slew of measures intended to address the affordability crisis. As part of the national housing, strategy are an enhancement to the Canada Worker's Benefit and a one-time tax-free payment of $500 to nearly two million Canadians. While these measures may seem like a good start to addressing the issue of affordability, they are not largely focused on the main driving forces behind the affordability crisis. That is a low supply and soaring demand. The Government of Canada giving tax breaks and incentives to Canadians is a show of good faith, but blatantly ignores many of the factors at play, such as foreign investment and over-regulation of newly built homes.
The Bank of Canada has made a few statements on how they expect policy changes to affect housing market affordability in Canada. Notably, they have used US monetary policy as a benchmark for how they expect Canada's housing market to evolve in the wake of policy changes.
The literature already in existence shows that housing values react to changes in monetary policy slowly, taking years to reach their maximal response. The BoC has offered fresh proof of a significantly quicker reaction. They use data from the CoreLogic Multiple Listing Service Dataset to extract information from listings for residential properties up for sale in the United States between 2001 and 2019. Using high-frequency measurements of monetary policy shocks, they claim to demonstrate that a contractionary monetary policy surprise of one standard deviation lowers house prices by 0.2% to 0.3% within two weeks, an impact that is comparable to the impact on stock prices.
In short, The BoC expects the market to react to their policy changes faster than some traditional data sets would imply. After keeping interest rates near zero over the course of the pandemic, the BoC is expected to continue incremental rate hikes in response to inflation.
Housing prices in Canada are continuing a steady decline in response to rate hikes from the Bank of Canada. Although house prices are falling in many Canadian markets, the most densely populated cities of Vancouver and Toronto are seeing a slower fall than other areas.
Although this drop is having a positive effect on housing affordability, the trend would need to continue for a significant amount of time before supply begins to catch up with demand. Responses from the Government of Canada may not be enough to address the problems at hand.
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