Charles St-Arnaud, the chief economist at Alberta Central, the central bank for the province’s credit unions, initiated his investigation with a straightforward question: What would it take for housing to become affordable again in Canada? Unfortunately, the answer for most cities in Canada is that it would require too much. St-Arnaud’s recent research poses a significant challenge to the efforts aimed at making housing more affordable in Canada. It suggests that the proposed solutions, such as increasing housing supply by building more homes to lower prices, may not have a substantial impact.
Currently, housing in much of Canada is at its least affordable in four decades. The affordability crisis was originally triggered by mortgage rates exceeding 18 percent in the early 1980s. Today, the steep price increases over the past decade, accelerated by the pandemic, have resulted in the current affordability crisis. Even with the Bank of Canada raising interest rates, significant price drops have not materialized.
In cities where real estate prices have skyrocketed, St-Arnaud’s findings are alarming. According to his calculations, prices would need to drop by 39 percent in Toronto, 33 percent in Vancouver, and 30 percent in Montreal based on current incomes. Alternatively, incomes would need to increase by 65 percent in Toronto, 50 percent in Vancouver, and 43 percent in Montreal to achieve affordability.
Despite these challenges, some good news remains as houses are still affordable in Calgary, Edmonton, and Winnipeg. St-Arnaud defined affordable housing as not exceeding 30 percent of an owner’s after-tax income, including utilities, property taxes, and insurance. He assumed a 20 percent down payment and a 25-year mortgage term, which are common practices in Canada.
St-Arnaud expressed concern for younger Canadians facing difficulties in affording a home and starting a family. While the government and provinces advocate for stimulating new housing construction to address affordability, St-Arnaud remains skeptical that this alone will be sufficient to achieve affordable housing. He highlighted the reluctance of politicians to undertake measures that could potentially lower the value of homeowners’ most significant asset.
Robert Hogue, the assistant chief economist at RBC, shared similar views, indicating that dramatic price drops in unaffordable cities are unlikely. He suggested that increasing rental housing supply could lead to lower rents and improve affordability. Hogue emphasized that homeownership in highly unaffordable cities may require compromises, such as settling for condos further from city centers or relocating to provinces with lower housing costs.
In conclusion, while achieving affordability in Canada’s housing market may be challenging, there are potential solutions and compromises that could help address the issue. As the situation evolves, policymakers, economists, and individuals will need to explore innovative approaches to ensure that housing remains accessible for all Canadians.
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