Is Canada facing a housing affordability crisis?

“We need to wake up. This is an affordability crisis that we are facing,” says Benjamin Tal, Managing Director and Deputy Chief Economist, CIBC Capital Markets.

Whether you’re a property owner, landlord or considering purchasing property, the housing market is something that impacts everyone — and demand is currently outweighing supply. This means despite some downward pressure on home prices from rising interest rates, Canadian housing is becoming unaffordable to a significantly high proportion of the population.

A housing affordability crisis occurs when a large portion of the population is unable to afford suitable and adequate housing. This is seen when the cost of housing becomes disproportionately high compared to people’s incomes. This can be the result of a variety of contributing factors, including rapidly rising home prices, limited housing supply, high demand, and stagnant wages. As a consequence, individuals and families may struggle to find affordable places to live.

A combination of factors are causing housing to become unaffordable for many. Canadian home prices skyrocketed 46% during COVID-19 as a result of the pandemic and an extended period of low interest rates. Although housing prices have experienced uneven volatility since then, this is likely only temporary. As Mr. Tal confirms, “Any slowdown is only a blip. This is a very tight housing market.”

The main cause of housing becoming unaffordable is that demand continues to remain much higher than supply. Meanwhile, supply isn’t rising with new construction or with resales as people are not listing.

Mr. Tal explains, “Last year, we got no less than 950,000 new immigrants, non-permanent residents, people from the Ukraine, students. This year, I estimate roughly 1.1 million. None of them carries their house on their back.” This means there will be approximately over a million people seeking housing this year alone.

Higher interest rates can put downward pressure on home prices, and that’s what happened this July as the Bank of Canada (BoC) raised the overnight interest rate to 5% Opens in a new window.. Those with mortgages pay more in interest, causing some people to be deterred from buying property, thereby decreasing demand. People who already own properties may be forced to sell if their mortgage payments are increasing beyond what they can continue to afford, thereby increasing supply.

However, interest rate increases alone are not enough to offset the high demand and low supply issue for a significant period. For this reason, higher interest rates have not deterred the housing affordability crisis.

Higher interest rates have caused nothing more than a “modest decline” in housing prices, according to Century 21 Canada’s annual Price per Square Foot survey Opens in a new window.. Further, this decline hasn’t been seen across the board with many family homes in Ontario continuing to see price increases. Overall, the impact on housing prices has been largely uneven and likely temporary since demand remains high.

Continued volatility within the housing market is expected in the short term, especially if the BoC continues to adjust interest rates. However, unless there are major initiatives taken to increase the supply of housing, we expect home prices to continue to go up in the long term. “The long-term trajectory of this market is up if we don’t do something about supply,” says Mr. Tal.

While the obvious answer may appear to be that the Canadian government needs to increase the housing supply, doing so could be a complex task. Restoring housing affordability in Canada would require an additional 3.5 million affordable housing units to be available on the market by 2030, according to Canada Mortgage and Housing Corporation (CMHC) Opens in a new window..

Not only is that number staggering, but there are many obstacles that would be faced to arrive at this outcome. Barriers include delays in implementing this initiative, skill shortages, supply chain issues, and the fact that increasing supply would put upward pressure on the cost of construction.

Mr. Tal suggests, “We have to provide the reduced development charges, the fair HST payments. Basically provide incentives to developers to build apartment buildings. That is a big part of the solution.”

This content was originally created for CIBC Asset Management’s Advisor to Go podcast Opens in a new window..