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Haider-Moranis: The only solution is to build new housing
Published on 01 July 2024 • Last updated 1 day ago • 3 minutes reading time
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A new home for sale in a residential community in Ottawa. Photo by Sean Kilpatrick/The Canadian Press Files
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By Murtaza Haider and Stephen Moranis
Housing affordability in Canada has worsened since interest rates began rising in early 2022. And while recent and expected interest rate cuts by the Bank of Canada could improve affordability, a review by Desjardins Economic Studies concluded that a return to pre-pandemic levels is unlikely.
To recap, home prices soared from 2009 to 2017, with a brief slowdown in 2018 due to changes in stress testing. Between April 2020 and February 2022, extremely low interest rates sent home prices soaring. The rapid rate hikes that followed worsened affordability as higher mortgage payments made already expensive homes even more unaffordable.
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However, the bank's report does offer some hope to prospective homebuyers, as Desjardins forecasts a slight buying opportunity in late 2024 or early 2025 if interest rates fall as expected. However, this forecasted relief comes with some caveats.
The Desjardins Affordability Index (DAI) measures housing affordability in Canada's regional markets. The index compares the decline in mortgage payments due to falling interest rates with the expected increase in property values due to lower interest rates. Since any decline in interest rates is expected to be modest in the short term, the relief in mortgage payments will be minimal and will likely be offset by rising property values. The DAI also expects subdued income growth — the other often neglected variable in determining affordability — hence the probability The relief in improving affordability is only moderate, if any.
The report's findings may help explain the migration from Ontario to the western provinces. Despite the recent decline in affordability in Alberta, housing prices in this province remain significantly lower than in other Canadian jurisdictions. Considering that average household incomes are higher in Alberta than in Ontario, the migration to the west is understandable.
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Housing affordability is likely to be a key issue in next year's federal election. Election years are usually when promises are made to improve affordability. For example, extending the payback period, which is currently 25 years in Canada, could be part of the platform of leading candidates.
Desjardins' analysis warns that extending the payback period could worsen affordability in the medium term, as rising property values would offset the immediate benefits of longer payback periods. While some short-term beneficiaries may buy before prices rise, most potential buyers will not. Therefore, current and future policymakers should leave the payback period unchanged.
Housing activists in Canada have criticized the rapid increase in the number of international students and non-permanent residents, arguing that this increase has driven up demand for housing. In 2022 alone, Canada's population grew by one million, with the current annual growth rate rivaling that of some African countries.
The report estimated a planned reduction in NPRs of 25 to 35 percent by the end of 2026, but found no evidence that this would improve affordability. Their nuanced findings show that NPRs are more active in the rental market and have limited impact on the resale market. However, a more serious side effect of reduced population growth could be a reduction in housing supply, as some NPR workers are employed in construction. This reduced supply could exacerbate the supply-demand imbalance.
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The report also simulated the impact of a 1980s-like recession on housing affordability. Surprisingly, the conclusions echoed our earlier discussions about the unintended consequences of recessions restoring affordability. The report found that price declines and lower mortgage payments would be accompanied by massive layoffs and income losses. It warned that “those hoping for a recession should weigh their home-buying ambitions against the immense economic and social costs over the long term.”
If a recession, slowing population growth or longer payback periods can't improve affordability, what can? The answer lies in building more homes – a lot more. Desjardins claims that “increasing housing supply is the only sustainable long-term solution.” We agree, as does the Canada Mortgage and Housing Corporation, which estimates that the country needs to build 5.8 million new homes over the next decade to restore housing affordability.
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Canada's politicians have been addressing housing affordability for some time, often resorting to seemingly quick fixes. But there are no quick fixes to this problem. The only answer is to increase supply. This will require a concerted effort from both the public and private sectors, as well as a consensus that building more housing is essential.
Murtaza Haider is associate dean for graduate programs and director of the Urban Analytics Institute at the Ted Rogers School of Management at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. You can reach them through the Haider-Moranis Bulletin website, www.hmbulletin.com.
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