With prices still about nine times average income, Canada’s market has a long way to fall
Canada is still facing a housing affordability crisis despite a market cooldown in recent years – and prices need to continue falling to give hopeful first-time buyers a fair shot at homeownership, according to a leading lending executive.
Fausto Gaudio (pictured top), president and chief executive officer of community credit union IC Savings, told Canadian Mortgage Professional that the affordability question far outstripped other problems facing the market including lack of supply and rising mortgage interest rates.
He said the continued inability of many working Canadians to qualify for a mortgage marked a “real structural problem” for the real estate market. “The major factor in what’s happening is the unaffordability of housing,” he said. “That’s really the underlying issue that needs to be corrected.”
The challenges facing the market have developed over decades: wages have risen only modestly compared with a massive surge in average home prices, meaning it’s become increasingly difficult for buyers – especially those purchasing for the first time – to put together enough money for a downpayment.
The average Canadian home price, Gaudio noted, historically sat at roughly 3.5 to 4 times average household income, a level widely regarded as a marker of a sustainable market. But that average ballooned to 12 times the average income at the peak of the COVID-19 housing market, and even in a cooler market has only slipped to approximately nine times.
“In order to get back to a traditionally healthy market, we’ve got to get back to that 3.5 times, from nine,” he said. “That’s a lot. That’s a big distance to cover.”
Market watchers are divided on the best way to achieve that. Housing minister Gregor Robertson stirred debate last year when he suggested home prices don’t necessarily have to fall to unlock affordability for more Canadians.
Others say lower interest rates would improve the picture for homebuyers, but Gaudio doesn’t see that idea as a surefire hit. “You drop interest rates, the price of housing goes up,” he said. “So we need to think a little more globally.”
‘The whole industry was closing an eye to this’
The wave of speculative condominium investment that defined the Greater Toronto Area (GTA) market in the years leading up to 2022 sent prices skyrocketing there, although condo values have plummeted by about 20% since then amid a deep market freeze.
Units, many measuring between 400 and 500 square feet, were built for investors anticipating capital gains on a sale or flip rather than for families or owner-occupiers.
A market that stopped functioning as a conventional housing market and more like a commodity exchange was an unwelcome development, Gaudio said.
“Because of all the investors that came into the market, it bumped up the demand curve to such an extent that real estate just went up and it became mostly one investor trading a housing unit to another investor, almost like a commodity,” he said.
He said the mortgage industry didn’t push back enough on that trend. “Mortgage brokers, mortgage lenders, the whole industry was closing an eye to this,” he said. “Very few people were speaking out and saying, ‘Where are we going? This is going to create an unsustainable market.’ And that’s what happened.”
Is the federal government’s approach to the housing crisis working?
Prime minister Mark Carney has introduced a range of measures to try to ramp up home construction over the past year and a half, including his flagship Build Canada Homes policy – a federal initiative to turbocharge homebuilding and ease the housing crisis.
That plan has been met with a mixed response, and some scepticism over whether it can meet its goals. Only around 2,000 affordable units of the 19,000 planned are currently under construction.
Gaudio, though, said the government is at least moving in the right direction on improving the housing outlook. “The governments are doing a good job in bringing more product to the market by subsidizing not-for-profit housing, affordable housing,” he said. “That’s a good thing. That’ll help to normalize prices.”
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