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Building more housing is a better way to improve housing affordability
Published on Oct 9, 2023 • Last updated 9 hours ago • 3 minutes reading time
A person walks past a row of houses in Toronto. Photo by Cole Burston/The Canadian Press Files
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Home sales data from the Toronto region suggests markets are likely to favor buyers – some are even calling it a buyer’s market – given the sudden surge in listings.
Choices for homebuyers have certainly improved, but affordability hasn’t improved as much. For markets to be fully on the side of buyers, they need wide choice and affordability. Thousands more homes are available for purchase, but most remain unaffordable for middle-income people.
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According to the Toronto Regional Real Estate Board (TRREB), there was a 32 per cent increase in listings in September, bringing the sales to new listings ratio (SNLR) down to 28.6 per cent. The industry rule of thumb is that an SNLR of less than 40 percent favors buyers and more than 60 percent favors sellers. According to this rule, it looks like a buyer’s market.
The same report also said Toronto’s average home price increased three per cent in September compared to August. The average has increased by almost eight percent since January. If housing was once unaffordable, it is still unaffordable.
Housing affordability depends on both prices and mortgage payments. Affordability deteriorates when one or both rise sharply. Homebuyers have recently faced a double whammy of rising prices and borrowing costs.
From mid-2020, property prices rose rapidly as extremely low interest rates fueled their growth. Later, inflationary pressures necessitated an increase in lending rates, which rose from extremely low levels in 2020 to much higher levels not seen in decades. The consequences were inevitable: higher real estate prices were financed with even higher loan interest rates.
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The rapid increase in mortgage rates contributed to a significant increase in mortgage payments for those with a variable mortgage rate. Nearly 60 percent of Canadian homeowners have a mortgage, many of whom had previously chosen variable mortgage rates.
The Bank of Canada maintains a housing affordability index, a ratio of the average quarterly mortgage payment to average quarterly income. A higher index value indicates a deterioration in affordability. The index fell when mortgage rates were low, reaching its lowest level since the Great Recession in mid-2020.
However, the index rose 60 percent by the third quarter of 2022, indicating a deterioration in affordability. Affordability continued to deteriorate even as average prices fell in 2022. Higher borrowing costs offset gains from falling prices.
Most utility skeptics argue that building more homes won’t improve affordability as much as others think. However, they believe an economic recession could be helpful because falling housing prices correlate with recessions.
In some ways, the Bank of Canada’s affordability index supports the recession argument. The index has declined during past recessions, indicating improved affordability. However, this has more to do with a fall in borrowing costs than a fall in property prices.
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Hoping for a recession to cause housing prices to fall is like hoping for a flood to water your garden. From a policy perspective, a recession would probably be overkill to restore affordability. Additionally, falling property prices could have unintended consequences as consumers will reduce their demand for other goods and services.
Building more housing is a smart way to improve affordability. Statistics Canada mandates the construction of 3.5 million more homes by 2030, on top of what would have been built under the business-as-usual scenario. This requires a lot of capital.
Aled ab Iorwerth, deputy chief economist at Canada Mortgage and Housing Corp., puts the total price tag of building enough homes at $1 trillion, a significant if not prohibitive amount for a $2.2 trillion economy. Dollar. There are currently shortages of land, labor and building materials, in addition to capital shortages preventing the construction of millions more houses.
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The federal government recently partnered with two Ontario municipalities to help them accelerate new housing construction. The Housing Accelerator Fund’s federal investment of over $100 million is also a step in the right direction.
But given the magnitude of the challenge, governments must move from small steps to giant steps. Otherwise, you can’t blame frustrated buyers for hoping for a recession.
Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be accessed on the Haider-Moranis Bulletin website at www.hmbulletin.com.
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