Bridging the Gap: Canada’s Housing Challenge

In an effort to make homeownership more attainable for Canadians, Finance Minister Chrystia Freeland, under the Trudeau government, announced significant changes to the country’s mortgage and RRSP regulations. This announcement came amid concerns of an escalating housing shortfall, a contentious issue that has seeped deep into the roots of federal politics.

On a dreary day in Toronto, Minister Freeland conveyed the government’s latest strategy, aimed particularly at aiding younger Canadians who are feeling the pinch of soaring home prices. This demographic has increasingly found themselves sidelined in the housing market, a scenario that Conservative Leader Pierre Poilievre attributes to the policies of Prime Minister Justin Trudeau.

The government plans to almost double the RRSP withdrawal limit for first-time homebuyers from $35,000 to $60,000. This enhancement is poised to inject more purchasing power into the hands of potential homeowners. Alongside this, there’s a shift in the mortgage landscape, with the permissible repayment term for new homebuyers being extended to 35 years, and the term for mortgages on newly constructed homes to 30 years, up from 25.

These adjustments mean notably lower monthly payments, making it ostensibly easier for young Canadians to step onto the property ladder. However, this relief comes with a caveat. As Robert Asselin, a senior vice-president at the Business Council of Canada, pointed out, longer mortgage terms could mean more money spent on interest over time, deepening the financial commitment of homeowners.

The timing of these measures aligns with the government’s pre-budget housing policy blitz, which also includes a hefty $6 billion investment to assist provinces in building essential infrastructure. This funding is conditional upon municipalities easing restrictions on new constructions, like mandating the allowance of fourplexes, a move not universally welcomed across political lines.

Rental markets are not left out, with the government promising a national standard lease agreement and an increase in loans for rental constructions by $15 billion. Additionally, $600 million is earmarked to foster innovative and cost-effective construction techniques.

However, even with these proactive measures, the housing supply in Canada remains critically tight. The Parliamentary Budget Officer’s new report paints a grim picture of the current scenario — with a construction rate of 242,000 new units and demand still outpacing supply, reflected by a record low national housing vacancy rate of 5.1% in 2023. This crunch has driven home and rental prices upwards, signaling an urgent need for a dramatic increase in housing production.

The report estimates that to bridge the existing housing gap and meet the future market demand, Canada needs to erect an additional 1.3 million homes by 2030. This is a formidable challenge that would require boosting the current record-high construction rates by 80%, aiming for an average of 436,000 new units annually.

Such a surge in construction would not only strive to meet the existing demand but would also aim to curb the steep ascent in housing prices, making homes more affordable in the long term. Yet, the Canada Mortgage and Housing Corporation suggests an even more ambitious target of 3.5 million new units by 2030 to return to the more affordable pricing levels of 2004.

This brings us to a pivotal question: Can Canada innovate and mobilize its construction sector swiftly enough to meet these ambitious goals, or will the dream of affordable housing remain just out of reach for many Canadians? As we ponder this question, one must consider not only the economic impacts but also the social implications of a continued housing crisis. How will this shape the future of Canadian families, communities, and overall economic stability?

A Narrow Path: Evaluating Ottawa’s New 30-Year Mortgage Rule

The recent announcement from the federal government, spearheaded by Finance Minister Chrystia Freeland, introduced a shift in mortgage regulations that allows first-time homebuyers to opt for a 30-year amortization period when purchasing newly constructed homes. This move, intended to make home buying more accessible, particularly targets a specific demographic—those entering the housing market without the capacity to meet the standard 20% down payment on properties costing over $1 million.

However, this policy has sparked debate among real estate experts and economists regarding its actual efficacy in addressing the broader housing and affordability crises in Canada. Mortgage broker Ron Butler described the new measure as shockingly narrow, highlighting its limited applicability only to new builds and relatively lower-priced homes, considering the high threshold for down payments on more expensive properties.

The backdrop to this discussion is a housing market where first-time buyers represent just under half of all transaction activity, a share that has been declining, according to Robert Kavcic from BMO. Furthermore, the proportion of mortgages that are insured—and thus would benefit from the new rule—has dropped to about 15% recently.

The policy explicitly excludes resale homes to avoid exacerbating competition and driving up prices in an already heated market, as pointed out by John Pasalis, president of Realosophy. This selective application suggests a strategic governmental approach to stimulate demand specifically in the new construction sector, potentially to encourage the development of more housing.

Despite these efforts, the forecast for new home starts is not promising, with projections showing a significant decline in the coming years, from 47,400 in 2023 to potentially as low as 27,000 by 2025, according to the Canadian Mortgage and Housing Corp. This anticipated decrease underscores the challenges facing the new construction industry, which the government aims to support through these targeted mortgage changes.

In Toronto, a significant portion of the housing stock, including most detached and semi-detached properties, is priced over the $1 million mark, pushing first-time buyers towards townhomes and condos, which typically require smaller down payments but still necessitate mortgage loan insurance unless a 20% deposit is made. This requirement often aligns with builders’ needs for capital to initiate construction, further narrowing the field of who can benefit from the new policy.

Karen Yolevski, COO at Royal LePage, notes that while a longer amortization period does indeed lower monthly payments, it also means paying more interest over time, which can end up costing homeowners more in the long run. This trade-off, she argues, might be worth it if it enables more Canadians to step onto the property ladder.

Yet, the core issue remains unaddressed. Extending mortgage terms doesn’t fundamentally improve affordability or solve the housing crisis, as echoed by experts like Pasalis. There’s a looming possibility that terms could stretch even longer, to 40 or 50 years, which might still not provide a sustainable solution to the affordability crisis.

This leads us to a critical reflection on the path we are taking to solve housing affordability. Are we merely extending the timeline of debt for new homeowners without making real progress towards more accessible housing markets? Or are there other, more effective strategies that could be implemented to ensure that the dream of homeownership doesn’t slip further away from future generations? What does it say about our economic policies when the solution to housing affordability might just be to borrow more, for longer?