Housing Remains Unaffordable for Many Despite Slide in Prices

A sold sign is pictured outside a home in Vancouver, in a file photo. (The Canadian Press/Jonathan Hayward)

Higher lending rates by the Bank of Canada are causing homes to become more unaffordable despite a drop in prices, a trend that may continue until housing markets reach a new balance in 2023.

Interest rate hikes that began in March led house prices to drop for five consecutive months, according to Teranet’s National Composite House Price Index. The index, done in partnership with National Bank of Canada, fell a record 3.1 percent from August to September, breaking the previous record drop the previous month of 2.4 percent.

Robert Hogue, assistant chief economist at Royal Bank of Canada, says the falling price of housing is not surprising, as “home resale activity had reached sky-high levels” following the pandemic, and then dropped as the central bank raised its lending rates.

“We think that the Bank of Canada is not done, so those pressures coming from higher interest rates will continue to intensify in the near term,” Hogue told The Epoch Times.

“It will take a little bit more time for the market to absorb that increase. Our view is that it will probably take until about spring of next year for the market to bottom, and for the market to start to stabilize and eventually start to recover, but it’s likely to be a very slow grind in terms of recovery.”

Prices have not dropped commensurate with higher mortgage service costs. RBC’s most recent quarterly housing affordability report found that the average home ownership cost was 60 percent of median household income, surpassing the former record of 57 percent in 1990. The rate was 90.2 percent in Vancouver and 83 percent in Toronto.

Regardless, Hogue said home delinquency rates remain “exceptionally low.” He said going forward, a variable rate borrower might find their fixed payments no longer cover interest, but in most of these cases says the banks can adjust to terms the borrower can handle.

“Are we expecting the mortgage delinquencies to go up? Yes. Will they reach problematic levels? That’s a different question. We don’t think it will get to that point,” he said.

“Many were not overly keen on the stress test when it was first put in place back in 2018. I think now we’re seeing the benefit of prudence in the system.”

Belt-Tightening

Steve Ambler, an economics professor at the University of Quebec in Montreal, says those “silly enough to have variable rate mortgages” will still feel the pinch, as will those who must renew now and in the near future.

“Everybody in those groups is belt-tightening, which means that what’s happening in housing markets has a knock-on effect to demand in other sectors,” Ambler said in an interview.

“We know that a lot of Canadians upgraded their houses during the pandemic, and some people went into the housing market for the first time. If they were looking to get the biggest house that they could possibly afford, given what interest rates were in the middle of the pandemic, then they’re going to be in trouble.”

Ambler said better regulations in Canada should prevent negative home equity and other dire consequences such as occurred in the U.S. mortgage collapse around 2006. He said it’s unclear whether substantial rate increases by the Bank of Canada will cause too dramatic a correction.

“Will demand level off or will it actually fall? That’s the big question,” he said.

“If the Canadian economy plunges into a fairly deep recession, people are going to be saying, ‘The bank waited too long and [then adjusted] too fast. That’s why we’re in the mess we’re in.’ There’s always going to be somebody somewhere blaming the bank.”

Home resales have dropped more than 30 percent since February, RBC reported in September. National Bank’s housing market monitor report noted that on a year-over-year basis home sales were down 32.2 percent in September 2022 compared to September last year, the second-strongest month of September in history. The report said that sales were down in every province on a year-over-year basis, ranging from a 45.2 percent drop in B.C. to a 7.3 percent drop in Saskatchewan.

Despite the recent slide in prices, the Teranet report said that Peterborough was the only city whose price in September 2022 was less than that in September 2021, at an average drop of -6.6 percent.

Gap Between Home Prices and Earnings

Paul Kershaw, a professor at the University of British Columbia’s School of Population and Public Health, believes a drop in home values across Canada would help younger Canadians get established.

“Home prices have become disconnected from what typical Canadians can earn from their hard work,” he said in an email. “Our primary goal for home prices should be that they stall for many years ahead–or even continue to fall moderately.”

Kershaw says that on average, Canadians only needed to work 5 years in 1976 to make a 20 percent down payment on a home, compared to 17 years today.

“We can no longer tolerate the gap between home prices and local earnings growing any larger. It’s time for all levels of government to recalibrate their policies with the goal of ensuring that housing is for homes first, investments second,” he said.

Wendell Cox, a housing expert based in the United States who publishes reports with Canada’s Frontier Centre for Public Policy, agrees with Kershaw that high housing costs are a problem. He says land use policies to prevent urban sprawl have also prevented housing affordability, and that this problem looms larger than recent increases in mortgage rates.

“What we are doing through our allowing the distortion of the housing market by planning policies is we are ruining the quality of life for the next generation—not to mention putting severe limits on how well people live who aren’t so young,” Cox said in an interview.

“Housing affordability drives the quality of life that drives the cost of living. The cost-of-living crisis is principally a result of the housing affordability crisis. Our research shows that.”

Even so, Cox says higher mortgage rates will cause bigger challenges for those wanting a new home.

“If you’re a prospective buyer, you’re probably hanging on till these interest rates drop if you possibly can. They may not drop. I wouldn’t be surprised if they stay up a long time,” he said.

“The problem is, of course, you’re going to drive a lot of people out of the market by that point.”