Affordable homeownership may take a decade to return despite interest rate cuts
Canadian homebuyers may face a decade-long struggle to return to an affordable housing market, according to experts. Despite a gradual decline in interest rates, the combination of high home prices and stagnant spending power is likely to keep housing out of reach for many.
Economists warn that while the Bank of Canada is expected to continue cutting rates, it won't be enough to solve the affordability crisis, a problem that has dented Prime Minister Justin Trudeau’s popularity as he approaches the next federal election.
"You won't get back to an affordable range for housing on a sustained basis for a decade," said Tony Stillo, director at Oxford Economics, during a recent conference.
The surge in housing prices, which has seen average home costs rise by more than 30% since April 2020, has been compounded by rising interest rates. Many Canadians have been priced out of the market, especially in major cities like Toronto and Vancouver, as immigration has driven up demand.
Even with mortgage rates starting to ease, the current five-year fixed mortgage rate sits at about 4.75%, down 150 basis points from last year, but still too high for most buyers to re-enter the market.
“For the majority of potential buyers who are on the sidelines, if it means $50 or even $100 less a month thanks to lower interest rates, it's still unaffordable," said Robert Hogue, assistant chief economist at the Royal Bank of Canada (RBC). While some buyers may be able to afford homes next year, he said, the housing market remains far from balanced.
Affordability is determined by house prices, interest rates, and incomes, and for prospective buyers, these factors have shifted unfavourably since the pandemic began.
Monthly mortgage payments on a five-year fixed mortgage are still 40% higher than in January 2020, according to calculations based on average house prices from the Canadian Real Estate Association (CREA). Meanwhile, real household incomes have only increased by 2.3% in the same period.
For housing affordability to return to pre-pandemic levels, experts estimate that home prices would need to fall by at least 10% and mortgage interest costs would have to be cut in half.
In Toronto, often considered a key indicator of Canada’s real estate market, home sales are at a 20-year low due to unaffordable prices.
John Pasalis, president of Realosophy Realty, said that while interest rate cuts may lead to more activity, it would not be a “crazy market.” Many buyers still face mortgage rates between 6% and 7%, especially those with higher risk profiles.
"It's unbelievably unaffordable," Pasalis told Reuters.
The government recently adjusted mortgage rules, allowing first-time buyers and those purchasing new homes to take out loans with 30-year amortizations instead of the usual 25 years.
Read next: Housing starts in largest cities increase in 2024's first half
While intended to lower monthly payments, critics argued that the move could further boost demand and push prices higher. Finance Minister Chrystia Freeland disagreed, saying the measure would encourage builders to construct more homes to meet growing demand.
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