Analysis reveals why rate cuts and policy tweaks may fall short
While upcoming interest rate cuts may offer some relief to Canadian homebuyers, the improvement in housing affordability is expected to be minimal and likely offset by increasing property values.
A new analysis from Desjardins Economic Studies examined housing affordability trends in Canada since 2009. The report highlights the recent challenges faced by prospective homeowners due to surging housing prices and rapid interest rate hikes.
While the Bank of Canada’s rate cuts offer a glimmer of hope for prospective buyers in late 2024 or early 2025, Desjardins warns the relief will likely be minimal.
The Desjardins Affordability Index (DAI) analyzed affordability by comparing potential declines in mortgage payments against anticipated increases in housing values due to lower interest rates.
The report predicted that any decrease in interest rates will be moderate, resulting in minimal mortgage payment relief. This benefit is further dampened by the expectation of rising housing values as interest rates fall.
The analysis also factored in muted income growth, further dampening the prospects for significant affordability improvements.
This combination of factors may help explain the ongoing migration from Ontario to western provinces, particularly Alberta, where housing prices remain comparatively low and average household incomes higher.
Read next: Is ‘filtering’ the key to boosting housing affordability in Canada?
With affordability likely remaining a key issue in the next federal election, some may propose extending the amortization period beyond the current 25 years.
However, Desjardins warned against this approach, stating it could worsen affordability in the long run. Rising housing values would negate the initial benefits of longer amortization periods, ultimately benefiting only a few short-term buyers before prices climb further.
Housing advocates have blamed the rapid influx of international students and non-permanent residents (NPRs) for driving up housing demand.
While Canada’s immigration rate is high, Desjardins found NPRs primarily impact the rental market and have minimal influence on resale prices. However, reducing NPRs could have unintended consequences. A significant decrease in population growth could lead to a shortage of construction workers, further limiting housing supply and exacerbating the demand-supply imbalance.
The review simulated the impact of an ‘80s-style recession on housing affordability. While such a scenario might lead to price declines and lower mortgage payments, it would also result in massive layoffs and income losses.
Desjardins echoed the Canada Mortgage and Housing Corporation’s stance, stating that increasing the housing supply is the only long-term solution to affordability challenges. To achieve this goal, Canada needs to build an estimated 5.8 million new homes in the next decade.
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