Housing affordability affects us all. Whether you want to buy your first home, or you’re struggling to pay rent, or you want your children to be able to live in the same area they grew up in – but are currently priced out of – housing affordability affects you.
The federal government has recognized that Canada needs to build 3.5 million additional homes over and above the 2.3 million we would normally build in the next ten years to house Canadians and address affordability. That’s 5.8 million homes. But housing starts are slowing at a time when the opposite is needed to increase housing supply. And the lack of homes available is driving up house and rental prices.
Why are housing starts slowing? Rising interest rates through 2022 had a devastating impact on new construction sales, especially in the second half of the year. And CHBA’s Housing Market Index, which reflects industry sentiment through sales and sales centre traffic, suggests starts could be down as much as 30% moving forward.
Interest rates and other policy barriers are currently keeping the residential construction industry from being able to double housing starts and correct Canada’s housing shortage. But there are solutions.
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.
In addition to housing affordability, climate change is also top of mind for Canadians these days. 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 measures to improve housing supply so that demand doesn’t keep driving up prices, which will take federal leadership with a holistic approach. They’ll come from smart mortgage rules that address risks without locking too many Canadians out of homeownership, especially first-time buyers. They’ll come from lowering government-imposed costs that are currently adding to affordability challenges and removing barriers within the home building process that are making it harder to build homes. And 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 investing in increased productivity in the sector.
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:
1. CONTINUE FEDERAL LEADERSHIP, BUT WITH A HOLISTIC APPROACH – to increase market-rate supply and improve affordability
Canada is short 3.5 million homes.
We need more of the right kind of housing, in the right places. When there isn’t enough supply of the types of homes that people want to buy, house prices go up by too much, and too quickly. The government analysis and goal-setting of doubling housing production to make up the 3.5 million unit housing deficit in the next decade—on top of 2.3 million homes we would normally build in that time—has been very helpful and needs to continue.
The government also needs to ensure its own economic policies do not run counter to efforts to increase housing supply. For example, government action on interest rates, mortgage underwriting, taxation, and codes and standards should be viewed holistically, keeping in mind the goal of building more homes in mind. The federal government and its related institutions (Canada Mortgage and Housing Corporation (CMHC), the Bank of Canada, and the Office of the Superintendent of Financial Institutions (OSFI)) should work in close consultation to ensure their collective actions support more housing supply and do not inadvertently stifle growth.
Recommendations:
- Continue the goal of doubling housing production to make up Canada’s housing deficit of 3.5 million homes.
- Ensure the government’s own economic policies do not run counter to efforts to increase housing supply.
- Work in close consultation with related institutions to ensure collective actions support more housing supply and don’t inadvertently stifle growth.
2. REMOVE BARRIERS TO HOMEOWNERSHIP FOR FIRST-TIME BUYERS
There are three factors that determine housing affordability: the person’s income, the mortgage rules in play, and the price of the home.
First-time buyers continue to need consideration to help them enter the market. Wages have not kept up with today’s high home prices, and first-time buyers are inordinately affected by changes to mortgage rules, especially those to insured 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.
Rising interest rates over the past year and ever-tightening mortgage rules have made access to homeownership for first-time buyers more and more difficult. If they’re not buying homes, it reduces the industry’s ability to build more homes. It doesn’t mean that the demand for more homes has gone down, but rather that it’s been artificially repressed. And when young people who want to own homes can’t move out of rental units, it puts more pressure on the rental market, driving up rental prices. A healthy housing continuum includes robust market rate housing options, and diverse pathways to homeownership, support by sound mortgage policies.
We need to help young people overcome today’s obstacles to homeownership. And since one of the biggest obstacles – high home prices – is caused by a lack of supply, the key issue of housing supply should be considered in all monetary and regulatory policy (e.g. any actions by the Bank of Canada, Finance/CMHC, and OSFI)
First, interest rates must be lowered as soon as possible. The mortgage stress test should be also be lowered overall, and should be modified to reduce the test rate on a declining basis for 7- and 10-year mortgage terms, given the reduction in risk with longer mortgage terms for both Canadians and the financial system.
Don’t make changes through the OSFI B20 consultation (for uninsured mortgages) that make it even harder than it is now to buy a home. Mortgage arrears rates are already at historic lows of 0.16% according to the Canadian Bankers’ Association.
CHBA also recommends a return to 30-year amortization periods for first-time buyers. Such changes would go further to support well-qualified home buyers access to homeownership while strengthening the economy and the Canadian financial system. 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 25-year mortgage is 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.
In some markets, homes are much more expensive than others (again, largely linked to a lack of supply). CHBA recommends that the home price limit for insured mortgages in more expensive markets be increased to $1.25 million.
And finally, introduce a renovation tax credit for first-time home buyers so that an existing home can be renovated to fit their needs.
Recommendations:
- Lower interest rates as soon as possible.
- Lower the overall stress test and ratchet it down for longer-term (7- and 10-year) mortgages.
- Don’t make changes through the OSFI B20 consultation that make it even harder to buy a home.
- Reintroduce 30-year amortizations for well-qualified first-time buyers.
- Increase the home price upper limit for insured mortgages in more expensive markets to $1.25 million.
- Introduce a renovation tax credit for first-time buyers.
3. LOWER GOVERNMENT-IMPOSED COSTS THAT ADD TO AFFORDABILITY CHALLENGES
Government taxes and fees are a major contributor to high house prices, making up as much as 25 percent of the sale price of a home in some regions.
The Federal Government can help affordability by lowering the GST on new homes. House prices have increased substantially since the GST was introduced in 1991. The New Housing Price Index, which measures the change in newly constructed house prices over homes, was 56 in 1991. It’s now 125—more than double. It is time to increase the thresholds of the ST/HST New Housing Rebate to reflect the increased price of housing today. When the GST was first introduced, the federal government made a commitment to adjust the New Housing Rebate thresholds every two years to reflect changes in housing prices, and thus to protect affordability over time (see Technical Paper on the GST, 1989, pg.19). However, those thresholds have never changed. They are currently $350,000 for the full rebate, reducing to $0 for anything over $450,000. Since the New Housing Price Index has more than doubled since 1991, the rebate thresholds should therefore be doubled as well, to $700,000 and $900,000. To further help affordability for Canadians who helping achieve Canada’s climate change goals, Net Zero Energy and Net Zero Energy Ready home renovations should be made eligible as “substantial renovations” to qualify for the GST/HST New Housing Rebate.
We also need to fix taxation on purpose-built rentals. We need more purpose-built rentals, but the tax system undermines the business model for them. To help, the government should zero-rate purpose-built rental housing for GST/HST (at least for development costs, if not also operating costs). It should also defer Capital Gains Tax and Recaptured Capital Cost Allowance on the sale of rental housing if the individual/business is reinvesting in rental housing. In addition, the introduction of a “Rental Retention Vendor Tax Credit” for private owners selling to not-for-profit groups who are reinvesting in new purpose-built rentals would help.
And finally, the government can assist municipalities in lowering their own imposed costs by increasing infrastructure and transit investments (to lower municipal development costs which get passed on to developers and—ultimately—homebuyers), and tie them to housing supply outcomes.
Recommendations:
- Lower the GST on new homes by increasing the thresholds of the GST/HST New Housing Rebate.
- Make Net Zero Energy and Net Zero Energy Ready retrofits eligible as “substantial renovations” to qualify for the GST/HST New Housing Rebate.
- Fix Taxation on Purpose-Built Rentals
- Zero-rate purpose-built rental housing for GST/HST.
- Defer Capital Gains Tax and Recaptured Capital Cost Allowance on the sale of rental housing if reinvesting in rental housing.
- Introduce a “Rental Retention Vendor Tax Credit” for private owners selling to not-for-profit groups and reinvesting in new purpose-built rental.
- Assist municipalities in lowering their imposed costs by increasing infrastructure and transit investments..
4. REMOVE BARRIERS WITHIN THE HOME BUILDING PROCESS
Barriers within the home building process result in delays and building more homes more difficult and costly, which in turn impacts housing affordability and the industry’s ability to build more homes. The government has recognized Canada’s shortage of 3.5 million homes over the next decade, and all levels of government should be trying to remove barriers within the home building process in order to facilitate increasing Canada’s housing stock.
The federal Housing Accelerator Fund (HAF) provides incentive funding to local governments encouraging initiatives aimed at increasing housing supply (e.g addressing inefficiencies in zoning, bylaws, approval/permitting delays, and NIMBYism). The federal government should continue to roll out the HAF to municipalities, and increase its funding to support municipal process improvements tied to housing supply outcomes.
The government should also make sure its own actions do not make homes even more difficult to build. It needs to fix the Underused Housing Tax regulations, which are creating unnecessary burdens, so that home builders and developers are excluded completely (as are Real Estate Investment trusts and publicly-traded companies.
Recommendations:
- Continue with the roll-out of the Housing Accelerator Fund and increase its funding.
- Fix the Underused Housing Tax regulations to exclude home builders and developers.
5. ADDRESS LABOUR SHORTAGES
We need to build an additional 3.5 million homes over the next ten years, in addition to the 2.3 million homes that would typically be built in that time frame. However, the construction industry continues to face chronic labour and skills shortages. BuildForce Canada’s 2022 Residential Construction Labour Market Information Report outlines how an aging labour work force and the expected retirement of some 22% of the labour force in the coming decade, equating to approximately 128,000 workers, will continue to be a key driver of demand for workers in the sector. A significant portion will need to come from groups traditionally underrepresented in the current construction labour force, including women, Indigenous people, and new Canadians.
Support for recruitment, training and for bringing skilled workers to Canada through immigration are all part of the solution. Updates to the immigration system are needed to proactively attract much-needed skilled workers in residential construction
The federal government also needs to encourage more Canadians to consider a career in the skilled trades and support Canada’s apprenticeship system. As a country, we need leadership to demonstrate these are good and valued jobs, and we need to support the people who work in them. The Canadian Home Builders’ Association is doing its part to promote the skilled trades and provide information to those looking to begin a career in residential construction. Visit our website for more information.
Recommendations:
- Update the immigration system to proactively attract much-needed skilled workers in residential construction.
- Encourage more Canadians to consider a career in the skilled trades.
- Support the apprenticeship system.
6. SUPPORT INCREASED PRODUCTIVITY
Given the skills shortage, there are currently not enough people to double housing starts, so increasing productivity in the industry is one of the necessary solutions. However, given the costly up-front capital needed to invest in modular and other factory-built technologies, it’s a solution that requires government support in order to be widely adopted. Just as the federal government is supporting innovation in clean energy, so too should it invest in necessary solutions to help alleviate Canada’s chronic housing shortage.
The Canadian Home Builders’ Association recognized the critical role of increased productivity within the sector. Our Modular Construction Council supports the increasing role of factory-built modular construction in the building industry through various avenues.
Recommendations:
- Prioritize and support investment in modular and other factory-built technologies thought investment tax credits, an innovation fund, and strategic financing.
- Support CHBA efforts for its sector transition strategy.
7. AVOID ADDING COSTS THROUGH CODES AND REGULATIONS
The federal government has policy levers to address climate change and improve affordability in tandem—and it will take smart policy to achieve this. Many new policy directions that put pressures for more stringent codes and regulations are very important, e.g. climate change mitigation, resiliency, accessibility and others.
While there is an important role that housing can play it is important to ensure that addressing climate change does not exacerbate housing affordability challenges along the continuum, driving homeownership further out of reach for more individuals and families, and reducing the number of social housing units that can be built.
Unfortunately, almost all short-term actions to address climate change policy priorities through regulation increase costs to housing. It is critical to innovate and find solutions to these challenges without driving up housing costs. CHBA is actively driving innovation within the sector. We’re engaged in the pursuit of affordable solutions through our CHBA Net Zero Energy Home Labelling Program, which has labelled over 1000 homes, as well as through many other areas, such as climate change adaptation.
In addition, it’s important to recognize that today’s new homes are already very efficient (and will continue to become even more efficient). But to address climate change within the sector, it’s critical to address the existing housing stock through energy retrofits during home renovations. CHBA’s Net Zero Home Labelling Program has expanded to include renovations to address this need.
It is important to invest in R&D to find energy efficiency measures that do not reduce affordability. The government should focus on innovation to bring down costs and scale up use first, before regulating excessively high levels of energy performance. CHBA cautions against adding excessive costs through code and/or regulation that will impact housing affordability in Canada, at a time when home is more important than ever. Better solutions can be and should be found first to improve affordability for consumers, not make it worse.
CHBA recommends having the EnerGuide Rating System (ERS) label on all houses at the time of resale to raise the energy literacy of Canadians, help home valuations truly reflect energy efficiency, and further encourage Canadians to make energy efficiency and retrofit investments on an accelerated pace in ways they can afford. Further, the ERS should be expanded and promoted as the backbone of all renovation incentives, tax credits, and other energy efficiency initiatives by governments, utilities, and other organizations. Consistency and clarity can help homeowners tackle climate change.
Recommendations:
- Invest in innovation and R&D for lower- or neutral-cost solutions that promote energy efficiency, climate adaptation and resiliency, accessibility and health and safety. Before regulating in these areas, cost-neutral innovations are required.
- Adopt affordability as a core objective of the National Building Code and all related standards to ensure that we are building better, more efficient houses for the same proce or less moving forward.
- Work with the provinces to have the EnerGuide Rating System (ERS) labels on all homes at time of resale.
Next Steps
Housing affordability and housing supply are intrinsically tied, and both are complex issues, 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.