By Max Singh,
The reality—What lies behind Canada’s housing crisis?
Canada’s housing market is among the most unaffordable in the world, with one of the highest house-price-to-income ratios among OECD (Organization for Economic Co-operation and Development) member states. Between 2000 and 2021, housing prices soared over 355 percent in Canada, while median nominal salary incomes for Canadians increased by only 113 percent.
But today’s housing crisis extends beyond unaffordable homes and supply shortages. It is rooted in a profoundly financialized housing system that idealizes homeownership and treats homes as financial assets instead of social goods. Such a free-market system will always fail to produce equitable housing outcomes. The market will always favor and to the advantage of those with strong purchasing power, leaving behind low- and moderate-income families whose housing needs cannot generate effective market demand. The consequence is growing housing inequality, with many low-income families and young people trapped in precarious living conditions.
According to StatsCan, Housing is part of a broader range of considerable affordability challenges. Households have felt pressure on their budgets since 2022 due to an overall rise in shelter costs and price increases for other items that make up the Consumer Price Index, such as gasoline (+34.0 percent since 2018) and food (+22.7 percent since 2018).
The Real Problems of Housing Affordability:
- Down Payment Challenges: With housing prices skyrocketing, the 5%- 20% down payment required has become insurmountable for many, particularly younger buyers. High rents, stagnant wage growth relative to home prices, and rising living costs make saving nearly impossible.
- Lack of Affordable Starter Homes: Due to profitability and zoning restrictions, housing developments often prioritize larger, higher-margin homes or luxury condominiums over affordable single-family starter homes.
- Misplaced Generational Blame: Blaming Baby Boomers for “holding onto homes” oversimplifies the issue. They are staying put due to limited downsizing options, emotional attachments, the need for housing stability in retirement, or even a need to house adult children who cannot afford to buy or rent housing on their own, not a desire to thwart younger generations from entering the housing market.
- Delayed Home ownership—Many young adults are delaying homeownership and marriage, opting to stay in their parents’ homes longer, postponing starting families, or relying on parental financial support to buy homes. This can widen intergenerational wealth gaps, which is terrible for future Canadians.
- Political Challenges: Legislation, such as in British Columbia, is only now tackling structural issues like prohibitive zoning regulations at the provincial level. Incentivizing affordable housing construction requires political will and collaboration, which can be slow and contentious. More must be done.
In a recent online article for the CIBC (Canadian Imperial Bank of Commerce.) on housing unaffordability, Benjamin Tal, Managing Director and Deputy Chief Economist, CIBC Capital Markets. Said, “We need to wake up. We are facing an affordability crisis. The main cause of housing becoming unaffordable is that demand remains much higher than supply. Meanwhile, supply is not rising with new construction or resales as people are not listing.”
Mr. Tal further explains, “Last year, we got no less than 950,000 new immigrants, non-permanent residents, people from Ukraine, and students. This year, I estimate 1.1 million. None of them carries their house on their back. This means approximately over a million people will be seeking housing this year alone.”
How have interest rates affected the housing market?
Higher interest rates can put downward pressure on home prices. However, interest rate increases alone are insufficient to offset the high demand and low supply issues 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 Real Estate Company Century 21 Canada’s annual Price per Square Foot survey. Overall, the impact on housing prices has been largely uneven and likely temporary since demand remains high.
Lower Interest rates will not resolve the Housing Affordability Crisis
The Bank of Canada’s interest rate cuts will not resolve Canada’s housing affordability crisis. Factors such as skyrocketing home prices, unaffordable down payments, and stagnant wage growth are other primary challenges to address.
When the Bank of Canada lowers its rate, it primarily impacts Homeowners with variable rates who would likely see a reduction in their payments, with more of their payments going toward principal rather than interest. People without debt and savings (primarily seniors) will see a drop in their investment returns. In contrast, fixed-rate mortgages, which are not directly tied to the Bank of Canada’s rate, are influenced more by the bond market, particularly the 5-year government bond yield. The current trend in bond yields suggests that fixed mortgage rates could, however, also decrease over time.
The frequency and consistency of the Bank of Canada meetings on interest rates give the impression that rates are the primary issue, even though they are just one part of a complex system. For example, even if the Bank of Canada dropped interest rates below zero, it would do little to solve today’s homeownership affordability issue. “The long-term trajectory of this market is up if we don’t do something about supply,” says Mr. Tal.
What can be done to mitigate the housing affordability crisis?
According to the Canada Mortgage and Housing Corporation (CMHC), restoring housing affordability in Canada would require an additional 3.5 million affordable housing units to be available by 2030. Many experts regard this as unfeasible for various reasons.
Others say there needs to be a focus on Housing Policy Innovations to create housing, increase supply, curb speculative investments, and provide targeted assistance for builders to build modest starter homes and increase housing stock. On a more fundamental level, younger people need to be financially literate in planning and starting to save or make real financial goals to save up for a home much earlier in life. The most profound systemic barriers, such as the inability to save for a down payment, require targeted policies, structural reforms, and intergenerational collaboration to be tackled effectively.
The focus must shift from short-term rate adjustments to long-term solutions that prioritize accessibility and affordability in housing. Without meaningful action, homeownership will remain out of reach for many, perpetuating the cycle of financial inequity across generations.
Information Sources – Bank of Canada, Royal Bank of Canada Economics, Benjamin Tal, Canadian Mortgage Trends, Statscan. Government of Canada Housing Report, The Conversation, Financial consumer Association of Canada, Canada Mortgage and Housing Corporation, Expertfile.com, Century 21 Real Estate. Organization for Economic Co-operation and Development (OECD).
