Interest rate cuts won’t fix Canada’s housing affordability crisis

Originally published in the Financial Post on July 01, 2024.

Since interest rates began to rise in early 2022, housing affordability in Canada has worsened. And while the Bank of Canada’s recent and expected rate cuts may improve affordability, a review from Desjardins Economic Studies concluded that a return to pre-pandemic levels is unlikely.

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.

The report’s findings may help explain the outward migration from Ontario to the western provinces. Despite recent affordability erosion in Alberta, housing prices in that province remain significantly lower than in other Canadian jurisdictions. Considering that average household incomes are higher in Alberta compared to Ontario, the western migration is understandable.

Housing affordability will likely be a key issue in next year’s federal elections. Election years usually bring promises of measures to improve affordability. Extending the amortization period, for example, which currently stands at 25 years in Canada, may feature in the manifestos of leading contenders.

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.

Housing advocates in Canada have criticized the rapid increase in international students and non-permanent residents (NPRs), arguing that this surge has driven up housing demand. In 2022 alone, Canada’s population grew by a million, with the current annual growth rate rivalling that of some African countries.

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.

Murtaza Haider is the associate dean of graduate programs and the director of Urban Analytics Institute at the Ted Rogers School of Management, Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website,