Before improving consumer access and purchasing power, there should be more homes
While government policies have helped alleviate some of the pain, housing affordability in Canada can be truly achieved only through building a much greater number of homes, according to a new analysis by the International Monetary Fund.
The government’s standard approach to the issue – and indeed, majority of the steps promised by this election’s candidates – is to improve consumer access to currently available housing.
This strategy is potentially dangerous, however.
“Even well-meaning policies that aim to improve housing affordability by increasing households’ capacity to borrow may unintentionally raise house prices—ultimately resulting in homebuyers having to borrow more and leading to higher household debt,” the IMF stated.
The reason for this is that even as purchasing power improves, housing supply is fixed in the short term.
“So, any increase in households’ ability to borrow will increase demand for housing, increase house prices, and ultimately make houses less affordable than they otherwise would have been.”
This has become particularly apparent in Toronto and Vancouver.
“Homebuyers have been able to borrow more money over time due to rising incomes and a significant decline of mortgage interest rates over the past two decades. As a result, increases in borrowing capacity have been quickly reflected in higher house prices,” the IMF explained. “Overall, this has contributed to a rise in the size of down payments as a share of income and a push towards higher loan-to-value ratios.”
The IMF urged that improving supply should prioritize accelerating the delivery of development-ready land, as well as streamlining the permits/re-zoning approval process.
Federal and provincial governments should also look at ensuring that construction projects are not delayed, as well as providing incentives for the development of more purpose-built rentals.
Most importantly, Ottawa should consider “re-evaluating rent control policies to improve the supply of rental properties and give households more dwelling choices.”