Haider-Moranis: The only solution is to build new homes
By Murtaza Haider and Stephen Moranis
To recap: housing prices surged from 2009 to 2017, with a brief moderation in 2018 due to stress test changes. Between April 2020 and February 2022, ultra-low interest rates caused housing prices to skyrocket. The subsequent rapid rate hikes worsened affordability, with higher mortgage payments making already expensive housing even more out of reach.
The bank’s report offers some hope for prospective homebuyers, however, as Desjardins predicts a slight buyer opportunity in late 2024 or early 2025 year, if interest rates decline as expected. However, this forecast relief comes with some caveats.
The Desjardins Affordability Index (DAI) measures housing affordability in Canada’s regional markets. The index compares the decline in mortgage payments from falling interest rates against the anticipated rise in housing values due to lower rates. Given that any decline in interest rates is expected to be moderate in the short term, mortgage payment relief will be minimal and likely offset by increasing housing values. DAI also expects muted income growth — the other oft neglected variable in determining affordability — therefore the likelihood of improved affordability relief is only moderate, if at all.
Desjardins’ analysis warns that extending the amortization period could worsen affordability in the medium term, as rising housing values would negate the immediate benefits of longer amortizations. While a few short-term beneficiaries might purchase before prices escalate, most prospective buyers won’t. Therefore, current and future policymakers should leave amortization periods unchanged.
The report estimated a planned reduction in NPRs by 25 to 35 per cent by the end of 2026 but found no evidence that this would improve affordability. Their nuanced findings highlight that NPRs are more active in the rental market, with limited impact on the resale market. However, a more significant side effect of reduced population growth could be a reduction in housing supply, as some NPR workers are employed in construction. This lower supply could exacerbate the demand-supply imbalance.
The report also simulated the impact of an eighties-style recession on housing affordability. Surprisingly, their conclusions mirrored our previous discussions on the unintended consequences of recessions restoring affordability. The report noted that price declines and lower mortgage payments would be accompanied by massive layoffs and income losses. It warned that “those hoping for a recession should weigh their homebuying ambitions against immense longer-term economic and social costs.”
If a recession, or slowing population growth, or extended amortization periods cannot improve affordability, what can? The answer lies in building more houses — many more. Desjardins asserts that “increasing housing supply is the only sustainable long-run solution.” We concur, as does the Canada Mortgage and Housing Corporation, which estimates the country needs 5.8 million new homes built within the next decade to restore housing affordability.
Canada’s policymakers have grappled with housing affordability for a while now, often resorting to perceived quick fixes. However, there are no quick solutions to this issue. The only answer is to increase supply, which requires a concerted effort from both the public and private sectors and a consensus that building more homes is imperative.