Canadians have long considered owning a home as a life milestone and a key to future financial security. But housing affordability has deteriorated over the past decade, an issue that has intensified during the pandemic. Homeownership is under threat, and Canadians – especially young Canadians – are feeling like they may never be able to own a home.
Housing affordability is more than just the price of the home. 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. House prices have risen on average 32% over the last two years. Lower interest rates have helped some get into the market, but wages have not kept up. The result is affordability challenges for many aspiring home buyers.
You may think it’s not a big issue that it’s more challenging to buy a home. But did you know that 68% of Canadian families own their homes and 4 in 5 renters want to buy a home? That makes for 94% of Canadians that believe strongly in the many benefits of homeownership. And for good reason: CMHC reported that 85% of mortgage consumers agree that homeownership is a good long term financial investment. Statistics Canada also found that almost 90% of owners indicated that they are either very satisfied or satisfied with their dwelling while only 71% of renters said the same.
And the social benefits of homeownership are extensive. Research at Habitat for Humanity has shown that the families they help become homeowners are happier, healthier and more financially stable, which can allow them to return to school, learn a new trade or upgrade their job skills. The research shows that their children are more confident and do better in school.
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. The majority of Canadians do not regret becoming homeowners and that opinion has not changed during the pandemic, as 91% of homeowners said that they are happy with their decision to buy their current residence.
Affordable rent is also important to the housing continuum—both for long-term renters and those renters aspiring to buy a home. 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 in the last few years. Here’s a high-level overview:
In the past few years house prices have been rising across all types: single family homes, townhomes, condos, new or resale. Since July 2015, the Aggregate Composite MLS® Home Price Index (MLS® HPI) rose 71% and the New Housing Price Index increased by 21%. Year-over-year, the national average sales price increased by 15%, to $661,788 in July 2021.
While house values should appreciate a little each year, price escalation in recent years has clearly been excessive. While some price growth contributes to making the purchasing 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. Problems arise when house prices rise too quickly. So what has caused prices to increase so rapidly?
When it comes to the Canadian housing market, there has been a chronic under supply for years. Scotiabank analysis shows Canada has less housing units per capita than any G7 country. When it comes to housing prices, supply and demand are key, and this has been the biggest factor in price escalation 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. Over the years it has become more and more difficult to build enough housing supply, especially ground-oriented entry-level housing that is ideal for first-time homebuyers and young-families. That lack of supply and increasing demand, exacerbated further through the pandemic, has driven prices way up. During the pandemic many Canadians experienced a change in their working and living arrangements, driving the need for more space at home and providing them the ability to move further from their workplaces. Lack of spending on other typical things also created savings from many. This led to more and more demand, further exacerbating the shortage of ground-oriented housing that many people desire. As urban dwellers relocated to more rural areas, high demand and subsequent price escalations that were previously mostly confined to big cities began to be experienced by smaller cities and towns and rural areas.
In addition to lack of supply, like any commercial good, house prices are dictated by the cost to make the product (land, materials, and labour). This past year the price of lumber and other construction materials and appliances rose drastically in price due to a variety of factors, including the pandemic. Taxes and fees have also been driving up costs for years.
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, each additional month a project is in the approvals process adds an average of $2,812 in costs per month for a low-rise home (i.e. a single-detached or townhome) and $1,730 in costs per month for a high-rise home (i.e. a small or large apartment).
Housing prices are still rising much faster than incomes in most, if not all, parts of the country. National statistics show the average national home price is now more than seven times the average household income, according to data from the Canadian Real Estate Association and Statistics Canada. To put that into context, a household bringing in the median pre-tax income in Canada would have to save 10% of their income for 69 months (almost 6 years) to afford the minimum down-payment on an average home according to the National Bank of Canada, compared to 57 months last year. Lower house prices alone will not improve affordability without changes to mortgages rules and more supply.
Mortgage Rule Changes
Since 2015, there have been more than 20 changes to mortgage rules and policies by OSFI, CMHC or Finance Canada. And since 2009, there have been over 65. These changes were largely put in place in an attempt to lower overall consumer debt (though unfortunately little has been done to lower the other key parts of consumer debt, which unlike homeownership do not build equity, like car loans, credit card debt, and other unsecured loans).
It is also important to note that owning a home is a good and secure financial investment, both for Canadians and for the economy. Homeownership is a forced savings plan that builds equity, and- very few Canadians will ever default on their mortgage payments. In fact, mortgage delinquency rates in Canada continued to decline during the pandemic, with less than 0.25% falling behind on their payments. Even fewer will actually default on their mortgages.
This is also the case with first-time home buyers who, according to Sagen’s Financial Fitness Study, consistently outpace all Canadians on Financial Fitness and almost 3 in 4 first-time home buyers feel they are in good shape financially. CMHC’s latest Mortgage Consumer Survey found that 84% of mortgage consumers are confident that they will be able to make future mortgage payments.
While no policy move has been made to lower non-mortgage debt, the pandemic actually helped in that regard—Statistics Canada reported that credit card balances also edged lower with many being able to save during the pandemic. Equifax data shows that, excluding mortgages, the size of the average consumer’s debt in Canada fell 4.2% while non-mortgage delinquencies declined by 22%.
Despite non-mortgage debt going down, and the security of home investment improving, the cumulative effects of policy changes have made it harder to qualify for a mortgage, while lack of housing supply and other government policy have driven up the cost of housing. The combined effect of the changes in recent times, which are still growing, didn’t just knock out “at risk” Canadians; 127,000 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.
On top of this, changes to the mortgage stress test that were introduced in June 2021 resulted in a 4%-5% reduction in buying power, depending on the size of their down payment, affecting those at the margins of qualifying.
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 more housing supply to help meet demand and avoid rapid house price escalation. 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.