The Canadian home market is essentially the same as it has always been: hardworking individuals attempting to claim a little area of the earth as their own.
Like most basic ideas encroached upon by a complicated society (peace and environment, for instance), homeownership has become a goal that many Canadians must strive to achieve.
When first-time homebuyers enter the housing market in 2024, they could mistakenly believe that it has never been more accessible. These purchasers have never seen such high mortgage rates, high property prices, fast population expansion, or a shortage of available homes. However, recognizing the market and creating a strategy to survive it requires context.
It is critical to understand the magnitude of the struggle that lies ahead, whether you’re a potential homeowner or someone who wants to improve Canada’s dysfunctional housing market.
Supply: Household Formation, Population Increase, and Building Activity
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If house buyers had more properties to bid on, the frenzied overbidding that characterized the epidemic probably wouldn’t have been as noticeable. A transaction turns into an auction when purchasers believe that the property they are bidding on is their only opportunity to own a home.
For sellers and their real estate brokers, that is a dream scenario, but for the typical buyer, it is a nightmare.
How much of the housing market in Canada is oversupplied? According to a 2023 projection by the Canada Mortgage and Housing Corporation, 3.5 million more homes must be constructed in the nation by 2030 to “restore affordability.”
That is 3.5 million units on top of the millions of units that builders are expected to finish by then, not 3.5 million units in total. Even if housing starts doubled at a record pace annually for the following six years, they would still need to catch up to CMHC’s ambitious target of a little over 271,000 in 2021.
If the nation’s builders could keep up with the population increase, CMHC’s housing ambitions may not seem so unachievable. However, accomplishing them is difficult. Builders face not just the nation’s aggressive immigration goals but also labor shortages, costly increases, and sluggish approval processes.
The Impact of Immigration on the Housing Crisis
Immigration generally improves Canada. An increasing population fills the gaps in businesses experiencing a labor shortage, reduces the negative consequences of our declining national birth rate, and maintains a revenue base big enough to fund our healthcare system.
However, a high immigration rate also puts additional strain on Canada’s housing supply. The federal government projects the arrival of over 1.5 million additional permanent residents between 2024 and 2026. (That’s on top of the almost 1.1 million arrivals that occurred in the year that ended on July 1, 2023.) Every one of them will require a place to live, even if not all will own a house, and not all will remain.
It is useful to consider immigration in relation to the property market in the same manner that you would the Bank of Canada’s interest rate increases during the previous two years. The objective is to prevent the economy from collapsing, not to assist or hurt homebuyers.
Additional supply issues
The growing number of single-person homes poses further difficulties for the industry.
In 1961, four people lived in the typical Canadian home. That number fell to 2.4 by 2021, mostly due to an increase in single-resident households. Housing becomes increasingly necessary as more individuals choose to live alone.
According to RBC economists’ research from 2022, a mere decrease in family sizes would result in the creation of about 90,000 new homes between 2021 and 2024.
This increase in household formation is occurring at the worst possible time. According to Phil Soper, president of real estate firm Royal LePage, baby boomers aren’t yet old enough to start downsizing and flooding the market with their three- and four-bedroom houses, which is why builders aren’t able to meet demand.
Debt Problems
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High debt service ratios may likewise adversely affect Canadians’ prospects for mortgages. The amount of debt that separates a person from a more affordable mortgage increases. Additionally, debt levels have been rising for many years. When applying for financing, non-mortgage debt is already difficult, but rising housing values have also resulted in skyrocketing mortgage expenses.
With interest rates hovering around 18% at the time of the 1981 census, the average monthly housing expense for homeowners (including mortgage, utility, and tax payments) was $384. When interest rates were almost at all-time lows in 2021, the average monthly cost of housing for homeowners was $2,066.
Many Canadian house purchasers are asking themselves to maintain both a large mortgage payment and other debt commitments within a lender’s TDS restrictions.
Savings challenges
Over the previous few decades, Canadians’ savings levels have drastically decreased. The average increase in household savings between 2018 and 2022 shouldn’t be seen as the start of a trend. In 2018, the average household savings rate was a pitiful 0.625%; by 2019, it had risen to 2.1%. If COVID had not limited spending in 2020 and 2021 and inflation had not forced consumers to make expense reductions since then, household savings might not have increased from 2004 to 2008.
As minimum down payments climb in our country, declining savings rates are a serious worry. When the minimum 5% down payment rule was introduced in 2008, the average price of a house was $305,342. Buyers just needed to put $15,267 down to qualify for a mortgage. In 2023, a minimum down payment of $42,828 was required for the $678,282 average house price.
And it is the very minimum. Buyers could need to make a much larger down payment to pass the mortgage stress test and obtain financing in accordance with current house values or to qualify for a mortgage with a B lender.
What can a buyer of a house do?
At this point, hopeful homebuyers may have a realistically pessimistic outlook on the Canadian property market. However, there are always actions you may do to raise your chances of purchasing a house, like:
Increasing your earnings. In the era of side gigs, you may be able to supplement your income by using your skills and interests. Look into freelance possibilities online by visiting websites such as Fiverr.
Increasing your savings. It might be difficult to save money, but you can increase your down payment by eliminating wasteful spending and transferring the funds to a First-Home Savings Account. Getting a roommate and lowering your rent costs can also help.
Improving your credit. To find out what you can do to increase your creditworthiness, check your credit score and credit report. Make paying off your high-interest debt a top priority at the very least to make it less of a burden on your budget.
Anticipating a competitive market. You should expect a swift and harsh market when you’re ready to enter it. Early on, be pre-approved for a mortgage, and when you do, make sure to turn in all the appropriate paperwork to prevent any last-minute surprises.
Conclusion
There is little you can do to improve the housing market overall other than get active wherever you can.
When it comes time for elections, support candidates who have realistic proposals to increase the availability of homes. If you believe your ideas may help your community’s housing issue, suggest them to a local councilor or MPP.
Engage in meaningful discussions with individuals on the advantages of higher housing densities to counteract NIMBYism.
It is unlikely that Canada will have the type of housing crisis that would be required to restore affordability to the market, and we shouldn’t support it either. Even when our options are limited, we still need to work within them.