The Bank of Montreal (BMO) published a report highlighting Canada's housing affordability crisis. Despite the decrease in home prices over the past year, the country still faces an affordability problem. The Canadian Mortgage and Housing Corp. (CMHC) said Canada needs to add 5.8 million new homes by 2030 to address the issue. At the current rate of development, Canada would add only 2.3 million units, leaving a deficit of 3.5 million homes. Over two-thirds of the supply deficit was found in Ontario and British Columbia. Two decades ago, an average household needed 40% of their household income to buy a house in Ontario. In 2021, the number was close to 60%. The BMO report argues that it is impossible to increase the housing supply and flood the market with new units to drive down prices and rents. Supply issues, skilled-labor shortages, availability of serviced lands, and the high cost of financing are some of the challenges property developers are facing. It also pointed to the deterioration of affordability at a time when homebuilding has improved. Housing starts in the last two years were 40% more than the 50-year average, but affordability has not improved. The report indicated the role of investors in the housing market. According to a recent StatCan study, as of 2020, investors own around 25% of residential properties in five provinces. This percentage is likely to have increased during the pandemic when interest rates were very low. While the proportion of condos owned by investors is understandable, it is surprising to see they own almost 15% of single-detached homes they own.
Population growth is another critical factor for increasing housing demand and price appreciation. In 2022, Canada's population grew 2.7%, adding over 1 million people. Heightened immigration levels have driven the surge in rents across key markets in the country, including small cities with universities. In conclusion, the report pointed to the catch-22 situation — reducing home prices would discourage developers from building new homes, and addressing labor shortage through immigration adds to the pressure on demand. Thus, making it difficult to find a solution to Canada's affordability crisis. However, all is not lost yet. According to the National Bank of Canada's mortgage payments as a percentage of income (MPPI) index, mortgage payments as a percentage of income dropped by 3.2% to reach 60.9%. The affordability improvement seen during the first quarter was the best in the last four years. All the ten markets the National Bank tracks showed an improvement in affordability. The bank attributed the improvement to a continuing home price decline. Toronto and Vancouver's MPPI was 82.8% and 94.9%, respectively, well above the national average. |
