A recession would be overkill for restoring housing affordability

Houses for sale in Ottawa

Building more housing is a better way to improve housing affordability

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Housing sales data from the Toronto region suggests markets will likely favour buyers given the sudden increase in listings — some are even calling it a buyers’ market.

Homebuyers’ choices have undoubtedly improved, but affordability has not improved as much. For markets to be fully on the buyers’ side, they need plenty of choice and affordability. Thousands more homes are available to purchase, but most remain out of reach of mid-income earners.

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There was a 32 per cent increase in listings in September, according to the Toronto Regional Real Estate Board (TRREB), dropping the sales-to-new-listings ratio (SNLR) to 28.6 per cent. The industry rule of thumb says an SNLR of less than 40 per cent favours buyers and more than 60 per cent to favour sellers. Going just by that rule, it looks like a buyers’ market.

The same report also said the average Toronto home price in September increased by three per cent from August. The average has increased by almost eight per cent since January. If housing was unaffordable earlier, it is still unaffordable.

Housing affordability is tied as much to prices as it is to mortgage payments. Affordability worsens if either or both sharply increase. Homebuyers have recently been hit with a double whammy of rising prices and borrowing costs.

Housing affordability not just tied to prices. Interest rates matter, too

Housing prices starting in mid-2020 escalated fast as ultra-low interest rates fuelled their growth. Later, inflationary pressures necessitated an increase in lending rates, which jumped from those ultra-low levels in 2020 to much higher levels not seen in decades. The consequences were unavoidable: higher housing prices were financed at even higher lending rates.

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The rapid increase in mortgage rates contributed to a significant increase in mortgage payments for those with a variable mortgage rate. Almost 60 per cent of Canadian homeowners have a mortgage, many of whom had opted for variable mortgage rates earlier.

The Bank of Canada maintains a housing affordability index, a ratio of the average quarterly mortgage payment to the average quarterly income. A higher index value suggests worsening affordability. The index dropped when mortgage rates were low and in mid-2020 hit its lowest level since the Great Recession.

However, the index increased by 60 per cent by the third quarter of 2022, suggesting worsening affordability. Affordability continued to worsen even when average prices declined in 2022. Higher borrowing costs wiped out the gains from falling prices.

Most supply skeptics argue that building more homes won’t improve affordability as much as others think. But they do think an economic recession might help since housing price declines are correlated with recessions.

To an extent, the Bank of Canada’s affordability index supports the recession argument. The index has declined during past recessions, suggesting improved affordability. But this has more to do with a decline in borrowing costs than with a decrease in housing prices.

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Hoping for a recession to decrease housing prices is like wishing for a flood to water your garden. Policy-wise, a recession would likely be overkill for restoring affordability. Furthermore, falling housing prices could have unintended consequences since consumers will reduce their demand for other goods and services.

Building more housing is a prudent way forward to improve affordability. Statistics Canada prescribes building 3.5 million more homes by 2030 in addition to what would have been constructed under the business-as-usual scenario. This will require lots of capital.

Aled ab Iorwerth, deputy chief economist at Canada Mortgage and Housing Corp., puts the cumulative price tag for building a sufficient number of homes at $1 trillion, a sizable, even prohibitive, amount for a $2.2-trillion economy. There are currently land, labour and construction material shortages on top of capital constraints standing in the way of building millions of more homes.

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The federal government recently partnered with two municipalities in Ontario to assist them in speeding up new housing construction. The federal $100-million-plus investment from the Housing Accelerator Fund is also a step in the right direction.

But given the size of the challenge, governments will have to graduate from taking baby steps to giant leaps. Otherwise, frustrated buyers cannot be blamed for hoping for a recession.

Murtaza Haider is a professor of real estate management and director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.

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