Acute housing crisis remains despite new mortgage rule changes
Canada’s federal government introduced what it billed as drastic new mortgage rule changes last week in a bid to improve housing affordability – but a solution to the national crisis remains a long way off.
The new measures saw finance minister Chrystia Freeland extend eligibility for 30-year amortization periods and hike the cap on insured mortgages, potentially opening the door for buyers on the margins to enter the market.
Still, skyrocketing home prices across most major markets in recent years mean huge numbers of prospective homebuyers – especially those hoping to purchase for the first time – remain frozen out of the housing market with little chance of securing a mortgage.
The changes were greeted with a mixed reaction by experts and market watchers last week, with some viewing them as a positive step towards improving affordability and others believing they missed the mark.
Desjardins chief economist and strategist Jimmy Jean characterized the move as one that would “give the impression” of restoring affordability, but in reality promised only to extend the length of time people spent paying off their mortgage – and the amount of interest owed.
CIBC Capital Markets deputy chief economist Benjamin Tal, meanwhile, welcomed the prospect of an accelerated housing market recovery because of the changes but said attention to “inducing more homebuilding” was required.
Lack of inventory a familiar challenge for housing market
The pace of homebuilding, and a persistent supply shortage in the housing market, remain two of the biggest impediments to a healthier homebuying outlook. An uneven year for home construction continued in August, with the six-month moving average for housing starts sliding 2.9% from July.
Speaking with Canadian Mortgage Professional after the changes were announced, Mortgage Outlet co-founder Elan Weintraub (pictured top) highlighted the need for governments at all levels to cut red tape to expedite the construction process.
The federal government's ban on foreign ownership of Canadian housing has failed to materially lower prices or increase market inventory, according to a recent report from Royal LePage.
— Canadian Mortgage Professional Magazine (@CMPmagazine) September 20, 2024
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It’s currently taking too long for permits and zoning to be approved for homebuilders, he said, while additional costs are another formidable obstacle to construction. “Depending on the site… the cost can be 20%, 30% of the cost of construction [for] all the municipal fees and levies,” he said.
“If it takes one, to, three, four years to develop and you’re not making any revenue in that time, and you’re just paying cost after cost to keep the project going, and then you’re paying tons of money and fees – well, guess what? That’s going to translate into high costs for the buyers.”
That’s not to mention a land transfer tax, applying to all provinces except Alberta and Saskatchewan, which Weintraub said in many cases was outdated and based on tiers which are no longer relevant to the current market. “The Toronto version was set up years and years ago when prices were much lower,” he said.
“They need to relook at those tiers because almost [all buyers] are jumping to the near-highest or highest tier. When they established those tiers, the average home might have been $500,000 or $600,000, whatever it was, and now it’s $1 million. So the government is scooping more right off the top.”
Pandemic helped fuel current affordability crisis
Average home prices ballooned nationally during the COVID-19 pandemic, when plummeting interest rates helped spur a surge in demand and shone a light on the acute lack of inventory across the country.
The average price of a home was $488,862 in 2018, according to Statista – but jumped by nearly $200,000 by the end of 2021 and peaked at $703,875 by year-end 2022, an increase of nearly 44% in just four years.
Some believe a significant drop in home prices is the only hope many Canadians have of being able to afford a home in the city they live in. However, Prime Minister Justin Trudeau insisted in May that the government wanted to improve affordability without clouding the outlook for existing homeowners.
Housing “needs to retain its value,” Trudeau said in an interview with The Globe and Mail. “It’s a huge part of people’s potential for retirement and future nest egg.”
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