While much has happened in the last two years, the issues affecting housing affordability in Canada remain largely the same, with the pandemic intensifying the effects and awareness of those issues. The 2021 federal election is an opportunity for parties to communicate their understanding of the root causes of market-rate housing affordability problems, and for the next government to help unlock the door to homeownership – a goal that feels increasingly out of reach for many.
What affects affordability?
Housing affordability is more than just the price of a home. It’s drive by three main factors: the income of the potential buyer(s), house prices, and mortgage rules. You can read more about these factors and how they work together to determine whether or not homeownership is affordable here. Essentially, all three factors must be balanced. Incomes have to keep up with inflation, house prices can’t rise too quickly, and mortgage rules should allow well-qualified buyers to purchase a home.
What’s going on with house prices?
Over the last few years house prices have been rapidly rising, including entry-level homes. While some modest steady price growth is good (it has always contributed to making the purchase of a home a sound financial decision for many Canadians who need a place to live and want to see their living expenses go towards an appreciating asset), rapid price escalation isn’t beneficial overall.
So why are prices going up so quickly? While the pandemic exacerbated the issue, there has been a chronic under supply in the Canadian housing market for years. Canada’s population has continued to grow, but the number of homes hasn’t kept up. A shortage of supply combined with high demand means that the value of the homes that do exist go up in price. This has been doubly true during the pandemic where people’s changed housing desires (e.g. location, space), savings from not spending on other things (like vacations), and a low interest rate environment (meant to encourage spending to help the economy rebound) have all combined to increase demand for the limited number of homes available on the market.
Other factors also affect home prices, including the cost of land, materials, and labour, all of which have increased. Taxes, municipal permitting, and lengthy approvals processes have also made it more expensive to build homes.
Don’t low interest rates help affordability?
Low interest rates do help lower mortgage payments, but if house prices are high and incomes stagnant, low interest rates only help so much. It is also expected that interest rates will rise next year. Plus, low interest rates only help if you can quality for a mortgage in the first place.
Since 2015 there have been more than 20 changes to mortgage rules and policies to try to lower overall consumer debt and reduce risk in the economy. However, this has gone too far in limiting the purchasing power of homebuyers, especially and unfortunately well-qualified first-time buyers. Unlike other key parts of consumer debt (like car loans and credit card debt, which there hasn’t been much of an attempt to lower), homeownership builds equity—if you can qualify to buy your first home. We need a shift back to recognizing a home mortgage as financing an appreciating asset, rather than basic consumer debt.
First-time buyers have been disproportionately affected by the combined effects of policy changes in recent years, despite being the cohort who have the lowest rate of mortgage arrears. This means that even though interest rates are low, many first-time buyers can’t get into the market to begin building equity. Their inability to buy a home adds demand to the rental market, raising the price of rent. And if rent is too high, it keeps more people dependant on social housing. (This connection is called the housing continuum, and you can read more about it here).
How the government can help
Governments should help provide a stable market in which prospective homebuyers have reasonable access to homeownership, and in which those who rent do so because it’s truly their best option based on affordability and preference. The federal government can play a key role by supporting policies that will improve housing affordability.
Solutions will come in the form of measures to improve housing supply so that demand doesn’t drive up prices. They’ll come from smart mortgage rules that address risks without locking too many Canadians out of homeownership. They’ll come from supporting the residential construction industry to help keep it building and renovating—from supporting the workforce through immigration and training, to keeping the supply chain healthy and safe and operating. They’ll come from smart regulation that addresses other policy issues like climate change in ways and on a timeline that doesn’t excessively reduce affordability. And they’ll come from ensuring that federal infrastructure funding for provinces and municipalities is used to support actions that can incent new housing supply, especially transit-oriented development that gives people greater choice in where they live.
The 2021 federal election is an optimal time for a greater conversation about housing affordability challenges in Canada, and an opportunity for the next government to unlock the door to homeownership.
Read more about specific policy recommendations that can help unlock the door to homeownership and improve housing affordability.
Learn how each major national party is addressing those policy recommendations here.