Housing affordability affects us all. Whether you want to buy your first home, or you own your home and it’s your biggest asset, or you’re struggling to pay rent, housing affordability affects you.
Three in four Canadians think when you are middle class you should be able to own a home, and 94% of Canadians own their home or want to (Earnscliffe Strategy Group for CHBA). For younger people, it’s their biggest concern: 64% of millennials consider housing affordability their top issue for the federal government, according to a recent poll by Abacus Data (for CREA).
Young Canadians are concerned for good reason. Well-qualified, well-employed individuals and families are being squeezed out of homeownership. The federal, provincial and municipal governments have regulatory and policy levers that can improve affordability now, and over the long term.
The Role of Government
All levels of government have a role to play. 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.
Remember that housing is a continuum, and that ensuring a healthy market for the 4 in 5 Canadian renters who want to buy a home frees up space and resources for Canadians who truly need them.
And whether you are interested in affordability, climate change, or both, how political parties address climate change in housing is also key to follow. We need to ensure we help our planet while also keeping the dream of homeownership alive for Canadians. The two are not mutually exclusive, but it will take smart policy to get it right.
Policies that will improve housing affordability
So what measures can improve housing affordability? Solutions will come in the form of smart mortgage rules that address risks without locking too many Canadians out of homeownership. They’ll come from measures to improve housing supply so that demand doesn’t drive up prices. And they’ll come from ensuring that we have transit-oriented development that gives people greater choice in where they live.
At the Canadian Home Builders’ Association, we study how housing in Canada works, and we strive to ensure Canadians have access to the homes that meet their needs at a price they can afford. A healthy housing market is good for this key industry that creates so many jobs, yes. But it’s also good for Canadians, and it’s why we’re passionate.
The following policies can unlock the door to homeownership and improve housing affordability:
Bringing back 30-year amortizations for insured mortgages, just for well-qualified first-time buyers.
An amortization period is the time it will take to pay a mortgage in full. The longer the term, the smaller the payments – which means the home becomes more affordable. It’s why mortgages exist in the first place. Amortization periods for insured mortgages (mortgages with less than a 20% down-payment) in Canada have been reduced since 2009 and the current 25-year amortization maximum was introduced in 2012.
First-time buyers are inordinately affected by changes to mortgage rules, especially those to ensured mortgages, yet they are the lowest-risk group of buyers. They’re also the financial future of Canada. They’re starting their careers and their salaries are just beginning to grow. By the time their first 5-year term is up, most first-time buyers have a higher salary than when they applied for a mortgage. And most Canadians do not take their entire amortization period to pay off their mortgage (the average for 25-year mortgages is that they are actually paid out in much less time – about 18 years).
Reintroducing 30-year insured mortgages – not for all buyers, but for well-qualified first-time buyers – will address growing inequities in mortgage access and will deliver financial benefits to younger Canadians and Canada as a whole.
Adjusting the mortgage stress test to better align with current market conditions.
The federal government introduced a mortgage stress test in late 2017. To qualify for a mortgage, you now have to be able to afford your mortgage payments at the current interest rate, plus an additional 2%. That extra 2% was put in place as a safeguard; if interest rates were to rise suddenly, homeowners would have some cushion to still make their mortgage payments.
The way it works right now, the stress test applies to every insured mortgage applicant, regardless of what their mortgage term is. So, someone who takes out a 10-year term (and thus has a fixed interest rate for 10 years) is subject to the same 2% stress test as someone who chooses a 1-year term. It’s not a surprise that the number of 1-year term mortgages has risen by 60% in the last year. Shorter terms are easier to qualify for, but there’s less stability, and it subjects homeowners to rate increases within 12 months of buying home.
Adjusting the mortgage stress test by replacing the current universal 2% with a declining rate stress test based on the mortgage term makes sense. The longer your mortgage term, the lower the stress test percentage. Adding flexibility to the stress test will improve housing affordability while allowing people to make responsible choices, especially first-time buyers who just need to get their foot in the door of homeownership. It will also encourage move-up buyers to take longer terms that are less risky, while enabling them to move on from their starter homes to free them up for more first-time buyers to enter the market.
Committing to work with provinces and municipalities to increase market-rate housing supply.
CHBA has estimated that at current rates, Canada will be some 300,000 family-oriented housing units short over the next decade. We need more of the right kind of housing, in the right places. Governments at all levels need to target getting more housing supply available. This will help keep prices down for all homes, while also freeing up rental properties as people move into their first homes. We also need more rental properties.
Note that there has been a lot of talk about building more affordable housing (i.e. social housing). This is very important too. But building more social housing is not the same as building more market-rate housing that hard-working Canadians can afford to buy or rent. We need more of it all.
Affordability and Climate Change
The federal government has policy levers to address climate change and improve affordability in tandem—and it will take smart policy to get it right. If done wrong, house prices will escalate, buyers will be locked out, the existing housing stock (the principle emitter of GHGs) will not improve. But smart policy can improve the energy of new homes and the existing housing stock, help communities be more climate resilient, and do so without decreasing affordability. For smart recommendations, see here.
Other Measures to Support Affordability
While the above represent CHBA’s key asks around housing affordability, there are many other ways the next government can further support housing affordability. For CHBA’s other recommendations to support affordability, have a look here.
Housing affordability is a complex issue, but as you can see, there are tangible things the federal government can do to improve the challenges that Canadians are facing.
And while there is a lot of information out there on how affordability works, not all of it is accurate. Check out our continually-expanding Myths and FAQs page to see how much you know about housing affordability in Canada.