The homebuying outlook remains grim
Even with interest rates trending downwards, and the income required to purchase an average home across the country declining slightly, Canada’s overall housing affordability outlook remains dismal.
Summer rate cuts by the Bank of Canada helped improve homebuying prospects in July in all 13 markets included in Ratehub.ca’s monthly housing study – but eight of those required an annual income well in advance of $100,000 to fund a downpayment, keeping affordability out of reach of scores of buyers.
For mortgage brokers, those continuing affordability hurdles are dimming clients’ prospects of buying a home in many markets, particularly first-time buyers unable to turn to the sale of an existing home to fund a new purchase.
That’s due, in no small part, to eyewatering home price appreciation across the country since the COVID-19 pandemic, when a homebuying flurry and intense competition sparked a huge jump in average prices.
Do home prices need to plunge for affordability to return?
In August 2019, an average home was on the market for $525,000 – but that’s spiked to $719,000 as of July this year, according to the Canadian Real Estate Association (CREA), an increase of nearly 36% in just five years.
For Ryan Sims, a mortgage agent with TMG The Mortgage Group, that signals a market that’s simply overvalued. “People will say ‘the average [price] doesn’t necessarily tell you everything’, but right now in Canada, even after we’ve seen a bit of a pullback, you’ve still got the average house that’s unaffordable to the average Canadian on the average income,” he told Canadian Mortgage Professional. “And so if the average Canadian can’t buy a house, it means they’re too expensive.”
Despite recent interest rate cuts, a Royal LePage survey shows younger Canadians and homebuilders lack confidence. Kevin Lee of the CHBA notes that while rates are dropping, restrictive mortgage rules remain a barrier.
— Canadian Mortgage Professional Magazine (@CMPmagazine) September 3, 2024
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There’s no easy solution to that quagmire: only a substantial easing of current mortgage qualification guidelines, or a dramatic drop in home prices, would significantly improve the outlook for buyers, according to Sims.
His preference, although it may be uncomfortable for homeowners, would be for prices to fall. “They have to come down to make them affordable,” he said. “And I hope that’s what’s allowed to happen because if there is meddling by any level of government to make payments more affordable, it still keeps housing at ridiculously high prices that people shouldn’t be able to afford.”
What are political leaders saying about the housing crisis?
Sims was speaking to CMP in late August – before the Bank of Canada announced its third consecutive rate cut of the year this week, and before NDP leader Jagmeet Singh pulled the plug on his party’s confidence-and-supply deal with Prime Minister Justin Trudeau’s minority Liberal government.
An imminent election seems unlikely despite that move by Singh, although one will certainly take place by October of next year. With politicians set to hit the campaign trail at some point in the next 13 months, an admission by a federal political leader that home prices need to fall appears a distant prospect. “Would that be a good statement to make with the federal election coming up?” Sims said.
“Politicians do weird things coming into elections, so I don’t know what will happen – but I know what I want to happen, which is [for] house prices to come down.”
Trudeau maintains that it would be best for the housing market to “retain its value,” telling The Globe and Mail in May that housing remained “a huge part of people’s potential for retirement and future nest egg.”
The government has sought to boost Canadians’ chances of buying a home through measures such as the First Home Savings Account, and by boosting supply with Canada Mortgage and Housing Corporation’s (CMHC) Housing Accelerator Fund.
However, its approach has been panned by Conservative and Official Opposition leader Pierre Poilievre, who recently lambasted the Trudeau government for Canadian households’ mounting affordability woes.
Housing affordability is likely to continue improving as interest rates normalize, according to Bank of Montreal (BMO) economists Robert Kavcic and Sal Guatieri, partly thanks to a flat outlook for home prices in 2024.
Still, that’s unlikely to see much respite for Canadian homebuyers. Affordability is unlikely to return swiftly to pre-pandemic levels – and will remain “strained” in 2027, Kavcic and Guatieri said.
“We do see progress,” Guatieri said in the June note to clients, “but it’s going to take a long time to unravel something that took years to develop.”
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