The affordability crisis in Canada’s housing market could be set to worsen, says CMHC
A healthy pace of activity may be returning to Canada’s housing market – but with home prices projected to climb in the coming months, the familiar affordability hurdles faced by first-time buyers could become even higher.
After plummeting over the last 12 months in many of the country’s hottest markets, prices are set to stabilize around the summer and start rising again in the second half of the year, according to the national housing agency’s latest forecast, although the average national price is still expected to be lower than at the end of 2022.
Canada Mortgage and Housing Corporation (CMHC) said last week that a continued lack of inventory was likely to put upward pressure on home prices with a “much higher level of starts” required to improve affordability, according to its chief economist Bob Dugan.
Rising home prices and higher interest rates mean the challenges facing prospective first-time buyers show few signs of abating, said a prominent real estate executive.
John Lusink (pictured top), president of Right at Home Realty and Property.ca, told Canadian Mortgage Professional that while some new entrants to the market enjoyed a measure of relief at the height of the COVID-19 pandemic due to dramatically lower borrowing costs, a return to more conventional market conditions had erased that advantage.
“In 2021, I think buyers weren’t buying houses – they were buying payment plans,” he said. “Interest rates were so low that whether it was $1 million, $1.5 million, it didn’t matter. They were looking at a point and a half and saying, ‘Well, I can afford the payment.’ Today, of course, they’re being qualified at a much higher rate, and so price does matter. And so they aren’t qualifying.
“The outlook for the first-time buyer, if they aren’t long-term well employed and earning $125,000-plus, is bleak.”
The decline in average home prices that’s gripped Canada’s housing market over the last 12 months is expected to end this summer – although the overall yearly average price will probably be lower than it was at the end of 2022https://t.co/oYOI1FFbhB
— Canadian Mortgage Professional Magazine (@CMPmagazine) April 27, 2023
What are authorities doing to help ease the affordability crisis?
The federal government’s latest budget announced the introduction of a new First Home Savings Account (FHSA), available as of April 1, aimed at helping new buyers stash away savings to afford a downpayment on their first home.
To be a qualified borrower for the FHSA, you must be a Canadian resident, 18 years old or older, and a first time home buyer. Eligible borrowers can deposit up to $40,000 in the account – $8,000 per year for five years – on a tax-free in, tax-free out basis to contribute towards an initial deposit that’s often prohibitively high.
The measure marks the government’s latest effort to improve the affordability outlook for first-time buyers, with the shared-equity first-time home buyer incentive program already in place, but reportedly seeing little uptake in the country’s most expensive markets.
Still, Lusink said it remained unclear whether federal intervention would have its hoped-for impact in helping younger Canadians into their first home.
“Homeownership was the dream,” he said. “I think right now that dream is in question thanks to a lot of red tape, a lot of very poor policy… It’s a sad state of affairs, in my opinion.”
During a call to supplement the release of its latest report on the outlook for Canada’s housing market, CMHC’s Dugan pointed to some of the obstacles to solving the affordability crisis – for instance, the lack of “idle labour” to call upon to ramp up home construction.
How are Canadians feeling about steep housing affordability?
A Global News/Ipsos poll at the beginning of April indicated that 63% of Canadians who don’t currently own a home have “given up” on the idea of ever buying one, with those aged between 18-34 most likely to believe that while homeownership is a significant achievement, it’s also only for the wealthy.
RBC assistant chief economist Robert Hogue, meanwhile, has also highlighted the exorbitant cost of owning a home in Canada, although he noted in a recent report that the pace of deterioration in housing affordability is slowing.
Still, he said the banking giant is expecting affordability trends to improve “noticeably” in 2023, if only partially, due to the recent drop in average home prices. “Our call for a 15% peak-to-trough decline in the national RPS benchmark price would only partly reverse the more than 40% surge in the first two years of the pandemic,” he said.
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