Housing crash won't solve affordability crisis - analyst

A re-balancing, not a drastic downturn, is needed

Housing crash won't solve affordability crisis - analyst

Contrary to expectations, a housing crash won’t entice buyers back with more affordable units so long as the Canadian housing sector’s fundamentals remain broken, according to a new analysis by veteran public policy observer Steve Lafleur.

While Lafleur stressed that he doesn’t think a major price decrease is imminent, “even if we rolled back five years of price appreciation, Canadian housing will remain expensive,” he said. “And that’s not even accounting for the fact that rising interest rates increase the cost of borrowing. So even if prices go down, mortgage payments (and rents) can still go up.”

However, while economic fluctuations are an ever-present reality, “where it becomes a problem is when you’ve got a highly indebted country,” Lafleur warned.

“If business closures and layoffs mean more people start to miss mortgage payments, you’ve got a slightly bigger problem. Now layer on higher interest rates, and you can see how this might escalate.”

Read more: Major market correction imminent unless feds act soon, says top exec

Aggravating the risk is the abundance of speculative housing developments that only serve to deprive many Canadians of much-needed affordable housing supply.

“Housing prices probably aren’t going to plummet any time soon,” Lafleur said. “In fact, at this rate we’d need to double housing construction to keep housing prices from rising further.

“It seems likely that some of the excesses of the COVID-era will get flushed out (few people are rushing to move out of the cities anymore), but it’s more likely that transactions will decrease as sellers decide to wait out temporary weakness rather than that housing prices will collapse.”

Affordability should remain the overall goal of policymakers, but Lafleur said that “we need to re-balance housing markets, not crush them.”

“A sharp downturn in prices would just compound problems by leading developers to cancel projects, preventing pent-up supply from meeting demand,” he warned. “We need to be careful what we wish for. A deep recession isn’t going to fix our problems.”

The acquisition is expected to close in Q4 2022.