Is Canada’s housing affordability crisis as bad as it was a year ago? No.

Is Canada’s housing affordability crisis still ongoing? Yes.

The talk of affordability has dissipated in recent months as prices continue slipping from their peak earlier this year. Many financial institutions are anticipating declining prices heading into the new year, with projections as deep as 25 per cent.

While this is a considerable drop in home valuations, prices are expected to remain above the pre-pandemic levels. This is especially true in many major urban centres, such as Toronto and Vancouver.

RBC published its latest housing affordability report that confirmed the situation has not been this bad since the early 1990s. The aggregate affordability gauge for Canada jumped 3.7 percentage points to 54 per cent in the first quarter. RBC sees conditions changing, with property values potentially tumbling more than 10 per cent over the next 12 months.

The Bank of Canada’s ‘forceful’ interest rate hiking campaign will further inflate ownership costs in the near term, putting RBC’s national affordability measure on a path to worst-ever levels,” RBC senior economist Robert Hogue said in the report. “However, we see the burgeoning price correction eventually bringing some relief to buyers.”

The Bank of Canada (BoC), which highlighted comparable data in its last real estate market assessment, has been trying to bust inflation with higher interest rates. During the July policy meeting, the central bank approved a supersized one-per-cent rate hike. The expectation is that more rate hikes are likely in the coming months. The objective has been to ease rampant price inflation, which is the highest it has been since the early 1990s. Still, it has also had broader consequences, particularly for the Canadian real estate market.

According to the Canadian Real Estate Association (CREA), home prices slipped five per cent month-over-month in July, to just below $629,971. Of course, prices are much higher in certain segments of Canada’s housing market. While prices have eased and affordability has improved on the one hand, the cost of borrowing has also increased.

Therefore, the solution is what the industry experts recommended last year: More supply.

3.5 Million New Homes Needed by 2030 to Tackle Affordability Crisis

A new study by Canada Mortgage and Housing Corporation (CMHC) found that the country needs approximately 3.5 million more affordable housing units by the year 2030 to accomplish the federal government’s affordability objective. This is in addition to the 2.3 million new housing units already on track to be built between 2021 and 2030. Ultimately, CMHC study authors noted that the housing supply shortage, which is most intense in Ontario and British Columbia, needs to be addressed as soon as possible.

Increasing supply will be difficult. Critically, increasing supply takes time because the time to construct is significant, but so is the time to progress through government approval processes,” the report stated. “This delay means that we must act today to achieve affordability by 2030.”

In the last couple of years, amid near-zero interest rates and strengthening national demand, new housing construction has been on the rise. As a result, it is estimated that Canada’s housing inventory levels will increase by 2.3 million units in the next eight years. This would bring the stockpile total to around 19 million units, leaving the country short of the extra 3.5 million homes required to achieve affordability.

This could be challenging because of intense labour shortages and softening housing market conditions, the CMHC warned. In addition, government regulatory issues have hindered expansion in the housing market and productivity troubles that can prevent more supply from coming to the market.

There are supply issues, labour shortages at the moment, and the cost of financing is going up, so clearly there are short-term challenges,” said CMHC deputy chief economist Aled ab Iorwerth during a conference call.

BMO economist Robert Kavcic conceded that it would be an uphill battle for the Canadian real estate market to meet the CMHC’s goal, citing labour hurdles and inflation.

The jobless rate in construction is near a record low; vacancies are at a record high, we have a deep shortage of skilled trades, and the cost of building materials is already rising quickly,” Kavcic told CBC. “So, unless the economy really rolls over and is in need of stimulus, effectively doubling the rate of new construction over the next decade will be extremely difficult without significant inflationary pressure.

Will Demand Ease?

The latest CREA data show that national home sales declined by 5.3 per cent month-over-month (but the number of newly listed properties also declined by 5.3 per cent) with activity levels below historic figures for this time of year.

At the same time, Ottawa will be welcoming approximately 1.2 million immigrants as part of the federal government’s ambitious three-year plan to restore immigration to Canada. With newcomers typically establishing a presence in Toronto and Vancouver, this addition will likely contribute to elevated demand volumes, which could also apply pressure on supply levels.

Ultimately, demand could maintain its downward trajectory as the present rising-rate environment makes borrowing more expensive and enhances the mortgage stress test. So, for now, the Canadian real estate market might benefit from a break from the pandemic-era frenzy of the last two years.