The return to affordable housing will not be so simple.
“While lack of affordability is a widespread problem, there can be no single solution: providing financial assistance and building more social and affordable housing will help those on low incomes, but it must also increase the supply of housing for the market. […] Various government policies need to be put in place and investments must be made from different sources, both private and public. The magnitude of the challenge is such that the private sector must participate: governments cannot do it alone,” stresses Aled ab Iorwerth.
The Deputy Chief Economist of the Canada Mortgage and Housing Corporation (CMHC) redirects the gaze to the projections of the organization published in June. One could then conclude that the unaffordability of residential property might even take root. We need 3.5 million more homes than current projections to restore affordability by 2030, CMHC estimated. An estimate that “takes into account both the future increase in demand and the current situation of unaffordability”. Two-thirds of the 3.5 million missing units are in Ontario and British Columbia, a little less than one-fifth of the required supply is measured in Quebec.
In the shorter term, the sharp rise in interest rates is making its mark on the real estate market. The latest inflation data from Statistics Canada showed that the mortgage interest cost index was up 11.4% year over year in October. “This is the most pronounced increase since the 11.7% increase observed in February 1991,” indicated the federal agency. The Bank of Canada pointed out shortly before that households who renew their loans face an increase greater than those observed in the monetary tightening cycles of the last thirty years.
The pace of growth in the homeowners’ replacement cost index, which is associated with the price of new homes, remained high in October, rising 6.9% from 7.7% the previous month. As for rents, they were up 4.7% compared to October 2021. “This is the ninth month in a row during which the increase in rent prices is greater than 4%”, highlighted Statistics Canada.
Fast-track correction, but…
This homeowner’s replacement cost index has certainly been decelerating, year over year, every month since May 2022, when the increase reached 11.1%. In addition, the Teranet-Bank house price indexNational posted a decline of 1.9% in September to align a fifth monthly contraction in a row. The index is down 7.7% since its peak in May. It has already been written that by way of comparison, during the financial crisis of 2008, prices had accumulated a decline of 6% over the same period. And 9.2% in total over eight months. But the sharp rise in interest rates, driven by a 350 basis point hike in the key rate since March, has ultimately canceled out the effect of the housing price correction on affordability.
The Parliamentary Budget Officer (PBO) has measured that the gaps in the affordability of property prices have continued to widen in 2022, in all the regions under study. He estimated that the gap between the average price of properties and the affordable level across Canada was 67% last August. It was more than 50% for Montreal.
And given the rather aggressive monetary tightening by the Bank of Canada, the cumulative correction could reach a record 15% at the Canadian level by the end of 2023, forecasts the National Bank. In its home price adjustment scenarios, based on assumed increases in mortgage rates (which would increase to 6.25% in the case of the 5-year fixed rate), PBO placed the price decrease between 12 and 23% per compared to the 2022 peaks, the PBO taking care to specify that these scenarios are presented as an indication and not in the form of forecasts.
Oxford Economics went further in its latest forecast, citing a 30% peak-to-trough correction, combining the effects of rapidly rising rates and slowing job growth. This does not prevent him from forecasting that the payment on a typical mortgage loan will post, on average, an increase of 11.3% towards mid-2023 while the average price of residential real estate will have maintained an increase of 5 % compared to its pre-pandemic level if the 30% plunge is verified.
And mid-2023 could coincide with a pick-up in economic activity, says the Bank of Canada in its October Monetary Policy Report. It says household spending will firm up from the second half of 2023 and through 2024. “Growth in population and disposable income will support demand as the impact of tighter financial conditions will dissipate. To add that “residential construction will be stimulated by strong immigration in markets that are already particularly tight. […] Strong immigration will also support rising housing demand in 2024 . »