Lower interest rates and rising incomes to help, but challenges persist
Canadians looking to buy a home can expect some relief in affordability, but it won't be a quick fix, according to a Bank of Montreal (BMO) report.
Economists Robert Kavcic and Sal Guatieri predicted a gradual improvement due to a combination of factors: falling interest rates, stable home prices, and rising incomes.
However, the projected improvement will still leave affordability "strained" compared to pre-pandemic levels, the report stated.
"We do see progress, but it's going to take a long time to unravel something that took years to develop," Guatieri said.
According to the bank's forecast, the average five-year mortgage rate will fall 75 basis points to 4.25% by 2027. It also projects flat home prices this year, followed by 3% annual price growth from 2025-2027 as incomes rise just under 3% per year.
Read next: How will the Bank of Canada's rate cut impact homebuyer sentiment?
"Even in this scenario, affordability will still be strained by 2027," wrote Kavcic and Guatieri.
The report also highlighted ongoing frustrations among younger Canadians struggling with high housing costs.
The Trudeau government has announced billions to accelerate home construction, but Canada Mortgage and Housing Corporation (CMHC) says supply is not keeping up with rapid population growth driven by temporary residents like foreign workers and students.
"It's a historic demand shock," Kavcic and Guatieri stated, noting Canada's population grew 3.2% last year – one of the fastest rates globally.
"The key driver of home-price growth is demographics," Guatieri said. "Even though the federal government is planning to curb the number of non-permanent residents, which will ultimately slow population growth...we still will see positive population growth."
An immediate return to "normal" affordability would require a 15% drop in home prices, 25% income jump or mortgage rates plunging to 3% or below, the economists estimate.
However, the Trudeau government has ruled out policies aimed at driving down home values. "Housing needs to retain its value," the prime minister told The Globe and Mail recently.
Instead, the focus is on gradually improving affordability over time through increased supply and higher incomes as interest rates stabilize.
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