Canadians have long considered owning a home as a life milestone and a key to future financial security. But a shift has happened in the last few years, and housing affordability has taken a hit. Homeownership is under threat, and Canadians – especially young Canadians – are feeling it.
Housing affordability is more than just the price of the house. It’s actually driven by three main factors:
- The income of the potential buyer(s)
- House prices
- Mortgage rules
These three factors all determine what is “affordable” to a buyer. Housing affordability is a balancing act. If incomes don’t keep up with the pace of inflation, if house prices rise too quickly, or if mortgage rules don’t allow for well-qualified buyers to purchase a home, then the balance is broken and affordability suffers. And that’s what Canadians are experiencing now.
You may think it’s not a big issue that it’s more challenging to buy a home. But did you know that 94% of Canadians either own a home or want to? And for good reason: Statistics Canada’s Survey of Financial Security shows that homeowners are 9.6 times financially more secure than renters. And yes, for sure, renting is indeed a great option for many Canadians for a variety of reasons, but locking aspiring Canadians out of homeownership isn’t good for their financial futures or that of the overall economy.
Affordable rent is also important; in Canada, about 80% of homes that become available for rent each year are freed up from people who stop renting to become homeowners. If they can’t buy a home, they continue to rent. This drives up demand for rentals, and results in the cost of rent going up. When renting becomes too expensive, the demand for subsidized housing increases and people in core housing need end up in emergency shelters.
Housing affordability and inability to access homeownership affects all Canadians. And when well-qualified first-time homebuyers, especially young and new Canadians, are locked out of homeownership in large numbers, it is a big issue.
What Has Changed?
To understand the problem, we have to look at what factors affecting housing affordability have changed recently. Here’s a high-level overview:
Mortgage Rule Changes
Since 2015, there have been 14 changes to mortgage rules and policies by OSFI, CMHC or Finance Canada. And since 2009, there have been over 60. These changes were largely put in place in an attempt to lower overall consumer debt (which includes car loans, student loans, and credit card debt, in addition to mortgages). Owning a home is a good financial investment, though, and very few Canadians will ever default on their mortgage payments (on average, less than 0.29% even fall behind in payments, let alone default).
The cumulative effects of those changes have succeeded in making it harder to qualify for a mortgage, but given current trends, they have gone too far. The combined effect of the changes, which are still growing, didn’t just knock out “at risk” Canadians; an entire one-third of prospective buyers are now locked out of homeownership annually. A disproportionate number of them (about half) are first-time buyers – young people who already had the lowest rate of mortgage arrears out of any age bracket.1
Since November 2015, house prices have risen by almost 30% across all types: single family, townhouse, condo, new or resale. Obviously, the price of the house, working in tandem with mortgages rules and incomes, affects affordability. But what has really caused house prices to go up?
Like any commercial good, house prices are dictated by the cost to make the product (land, materials, and labour), and the economics of supply and demand. Taxes and fees can also drive up costs.
As building codes have become more stringent, the cost to build to meet them has gone up. As labour shortages continue, the cost of labour goes up.
Development taxes, municipal permitting, and approval processes have made it more expensive to build houses. And NIMBYism (Not in My Backyard— efforts that delay or derail projects) add to costs too. For example, a one-month delay can add $6,000 to $12,000 to the cost of a home.
In addition to the cost of the home, supply and demand also come into play — and this has been a major factor in recent years. If there aren’t enough of the right type of homes to address the needs of buyers, then the value of the homes that do exist go up in price, and the homes around them go up in price as well. As it becomes more difficult to build enough housing supply, especially ground-oriented entry-level housing that is ideal for first-time homebuyers and young-families, the demand outpaces the supply and prices go up.
Housing prices are rising much faster than incomes in most, if not all, parts of the country. Recent reports show that typical annual incomes would have to almost double to keep up with housing prices. Lower house prices alone will not improve affordability without changes to mortgages rules and more supply.
What is Needed
Canadians need equilibrium returned to housing affordability. We need to ensure that well-qualified buyers can buy a home they can afford and that meets their needs. We need mortgage rules that strike the right balance between avoiding excessive debt and allowing responsible borrowers to finance what will likely be the biggest asset of their lives and a key part of retirement and financial planning: their home.
Right now, well-qualified, well-employed individuals and families are being squeezed out of homeownership. Their earnings are going towards paying rent instead of a mortgage. They are not building equity, they are not reaping the benefits of the forced-savings approach homeownership provides. Rent prices are going up due to the demand, and as the cost of renting rises, more and more people will need social housing.
All levels of government have a role in turning the tide. And the federal government can be a key player to unlock the door to homeownership, and in doing so help all Canadians. Read more about how the government can help.