What are the possible solutions to Canada's housing affordability crisis?

The challenges facing homebuyers show no signs of easing

What are the possible solutions to Canada's housing affordability crisis?

As the federal government prepares to unveil its new spending plans later today, the issue of housing affordability looms larger than ever on the horizon for millions of Canadians.

The grim outlook on the cost-of-housing front shows little sign of significant improvement. While home prices have plummeted across several major Canadian markets over the past year, that’s been accompanied by a spike in interest rates, ramping up borrowing costs for would-be homebuyers.

The government has kept its plans for the budget – set to be announced by finance minister Chrystia Freeland this afternoon – under tight wraps. While it’s expected to steer clear of measures aimed at stimulating housing demand, the announcement will feature policies to provide “targeted” help for vulnerable Canadians, according to Freeland.

Those would provide welcome relief for scores of Canadian homeowners who’ve seen their own budgets squeezed by rampant inflation during the last 12 months, but steep challenges for new buyers are set to remain.

Could affordability challenges destabilize the Canadian housing market?

The impact of the affordability crisis looks likely to reverberate for years to come, according to a new report by RBC. Authors Robert Hogue and Rachel Battaglia said lower housing affordability last year helped drive a “record surge” in demand for rental properties, with vacancy rates hitting a two-decade low as Canadians turned to the rental market rather than buying.

“With Canada’s immigration targets set at record levels and affordability poised to remain stretched,” they warned, “the pressure isn’t likely to let up.”

If that continues, and rental stock doesn’t see a significant uptick, the rental housing gap could balloon to 120,000 by 2026, Hogue and Battaglia noted – a scenario that “will tip the housing market into a greater state of imbalance.”

Shubha Dasgupta (pictured top), president and CEO of the Pineapple network of brokerages, told Canadian Mortgage Professional that he had seen little respite for new buyers despite the steep decline in prices witnessed in many regions.

“Unfortunately for first-time homebuyers, they’re still having challenges getting into the market,” he said. “So low-downpayment mortgages are having really high payments that first-time homebuyers are uncomfortable with.

“Without family support, whether through parents co-signing an application or providing them larger downpayments through gifts or just saving, I feel that first-time homebuyers are still feeling the impacts of the current market.”

The cooler sales environment and spiralling rental costs, meanwhile, are also convincing many prospective sellers to change their plans, according to Dasgupta.

“We’re also waiting for a little bit of seller sentiment adjustment… Given the fact that rental rates are so high and increasing on a daily basis, a lot of sellers are deciding if they’re not getting the price that they want on a property, that they would just be OK putting it up for rent and holding onto it until the market recovers a little bit,” he said. “So that’s taken a little bit of inventory opportunity away from first-time homebuyers as well.”

What can be done to solve the affordability crisis?

Introducing new incentives to heat up the housing market again is unlikely to be high on the federal government’s list of priorities in the short term, especially given its emphasis on a measured budget in line with the Bank of Canada’s efforts to tackle inflation.

In the long run, though, policies that could create a smoother path to ownership for new buyers might include greater amortization periods specifically for first-time entrants to the market, Dasgupta suggested.

“My thought process is a one-time, 30-, 35-, or 40-year amortization opportunity. Have a certain age demographic to a certain property value to it,” he said. “And once you use it, you can’t use it again. If you sell your property, you can’t use it again.

“That might be [useful] in helping some of the younger generation get into properties, knowing that they have a longer runway to pay that mortgage off – just helping them with their qualification.”

The much-discussed mortgage stress test rate, he added, is another factor that could be revisited, particularly with interest rates having risen so dramatically in recent months.

On the overall outlook for the housing market, though, Dasgupta pointed to positive signs, including an apparent end to Bank of Canada rate hikes and the fact that inflation appears to be trending in the right direction (having fallen again in February, to 5.2% – well below last June’s high of 8.1%).

“Overall, the Canadian market looks to be restabilizing, or showing signs of a re-stabilization,” he said. “We’re not there yet, but it looks like we could come out of this fairly shortly.”

What measures do you feel could help tackle the affordability crisis in Canada’s housing market? Let us know in the comments section below.