Buying a home may remain out of reach for many Canadians for the foreseeable future

House prices in Canada have surged by over 30% since April 2020, leaving many potential buyers struggling with affordability. Economists and real estate agents warn that despite anticipated interest rate cuts from the Bank of Canada in the coming months, the issue of home affordability is likely to persist, especially as Prime Minister Justin Trudeau’s popularity continues to wane in light of this challenge.

While the Liberal minority government’s mandate runs until October 2025, an election could occur sooner as the Conservative opposition aims to unseat Trudeau after nearly a decade in power. According to Tony Stillo, director of forecasting at Oxford Economics, sustainable housing affordability may be a decade away.

The rise in home prices, coupled with a significant influx of immigrants, has exacerbated the housing demand, pushing many Canadians out of the market since interest rates began climbing two years ago. Although the federal government is relaxing some mortgage regulations to assist young buyers, questions remain about the effectiveness of these measures.

Currently, the lowest five-year fixed mortgage rate is approximately 4.75%, a decline of 150 basis points from a year ago. However, this slight reduction has not spurred a noticeable increase in home purchases. Robert Hogue, assistant chief economist at the Royal Bank of Canada, highlighted that even a modest monthly savings from lower interest rates remains unaffordable for many buyers.

In major markets like Toronto and Vancouver, the high prices continue to keep potential buyers at bay. While some buyers might be able to enter the market next year, it won’t be enough to restore equilibrium. Home affordability is influenced by house prices, interest rates, and borrower income, all of which have been negatively affected since the onset of the COVID-19 pandemic.

Since April 2020, average Canadian home prices have risen significantly, while interest rates peaked at 4.75% before beginning to decline in June. Even with the recent dip in mortgage costs, monthly payments on a five-year fixed mortgage remain 40% higher than in January 2020. Meanwhile, inflation-adjusted household income has only increased by 2.3%, highlighting a stark contrast to the 21% rise in nominal income reported by Statistics Canada.

To restore affordability to pre-pandemic levels, house prices would need to decrease by at least 10%, and mortgage rates would have to be cut by half.

Home sales in Toronto, often seen as a key indicator of the national real estate market, have plummeted to about 20-year lows due to exorbitant prices. John Pasalis, president of Realosophy Realty, noted that while activity may pick up with falling interest rates, it will not lead to a “crazy market.” Many borrowers, especially those with higher risk profiles, still face higher mortgage rates between 6% and 7%.

Recently, the federal government adjusted its mortgage rules, allowing first-time buyers and those purchasing newly built homes to secure loans with 30-year amortizations instead of 25 years. While this change aims to lower monthly payments and make home ownership more accessible, critics argue it could inadvertently increase demand and drive prices higher. Finance Minister Chrystia Freeland defended the move, asserting it would encourage builders to increase housing supply to meet rising demand.