Canada's Housing Affordability Crisis May Persist for Years Despite Rate Cuts

Buying a house may remain out of reach for many Canadians for the foreseeable future, with mortgage costs unlikely to fall enough to offset lofty home prices and weak spending power, economists and real estate agents say. Even with expectations that the Bank of Canada (BOC) will keep cutting rates in the coming months, the issue of home affordability - which has strangled Prime Minister Justin Trudeau's poll numbers - is unlikely to fade before the next election.
Many Canadians have been priced out of the housing market since interest rates started rising two years ago. At the same time, a huge influx of immigrants has pushed Canada's population to record levels, further boosting housing demand and prices.
For "the majority of potential buyers who are on the sidelines, if it means $50 or even $100 less a month thanks to lower interest rates, it's still unaffordable," said Robert Hogue, assistant chief economist at the Royal Bank of Canada. In the most expensive markets of Toronto and Vancouver, many potential buyers are still priced out, he said. Some of them should be able to buy a house next year, but not enough to restore balance.
Housing affordability is a function of house prices, interest rates and a borrower's income. Those metrics have skewed unfavorably for prospective buyers since the start of the pandemic. Canadian house prices on average have increased by more than 30% since April 2020, while interest rates soared by 4.75 basis points until they started coming down in June.
Calculations based on average house prices from the Canadian Real Estate Association show that monthly interest payments on a five-year fixed-rate mortgage are still 40% higher than in January 2020, even after a drop in mortgage costs from last year's highs.
During the same period, real or inflation-adjusted household income has risen by 2.3%, while nominal income has increased by 21%, according to estimates from Statistics Canada. For affordability to return to pre-pandemic levels, house prices would need to come down by at least 10% and mortgage interest costs would have to drop by half from current levels.

(Source: Reuters)