Bank of Canada says housing affordability is about boosting supply, not cutting interest rates

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The Canadian real estate market is notoriously unbalanced. Housing prices have increased by more than 35 percent in just four years. Mortgage interest costs increased 30.9 percent year over year. And rent prices are continually reaching record levels.

As inflation is brought under control, there are growing calls for the Bank of Canada to cut interest rates, easing at least some of these affordability issues.

But Bank of Canada Governor Tiff Macklem says lowering interest rates isn’t the silver bullet people are hoping for.

“Housing affordability is an important issue in Canada, but it cannot be solved by raising or lowering interest rates,” Macklem said. during a speech in Montreal Tuesday.

Macklem said the real problem is that housing supply has lagged behind housing demand for years.

“There are several reasons for this: zoning restrictions, delays and uncertainties in approval processes, and shortages of skilled workers. None of these things are problems that monetary policy can solve,” he said. he declared in his speech to the Council on Foreign Relations in Montreal.

Macklem admits that emergency low interest rates during the COVID-19 pandemic have helped fuel rising house prices during this time. And the central bank’s own research shows that “housing inflation” continues to drive inflation.

Fall in housing starts blamed on high interest rates

Randall Bartlett, senior director of Canadian economics at Desjardins, said rented and owned housing prices are expected to continue growing beyond their pre-COVID-19 pace beyond the end of 2024.

“One of the key takeaways from the Bank of Canada report Monetary policy report for January 2024 is that housing inflation will likely be the most important driver of year-over-year price growth in the first half of 2024,” he wrote in a research note.

A building with a sign saying "Stop raising rents" hanging from a balcony.
Prices for both rented and owned housing are expected to continue growing beyond their pre-COVID-19 pace beyond the end of 2024. Average rent in Canada is at an all-time high, with pressure particularly in hot spots like Vancouver and Toronto. (Patrick Morrell/CBC)

The issue of affordability is not new in Canada. But this has accelerated in recent years.

RBC Economics has what is called the “Total Affordability Measure”. Late last year, that index was “at or near the worst affordability levels ever seen in many markets,” with particular concerns in hot spots like Vancouver and Toronto.

“Nearly 60 percent of all households could afford to own at least one regular condominium apartment in 2019, depending on their income. This share dropped to 45 percent in 2023,” said the chief economist deputy. Robert Hogue wrote in an article released in December.

“An even smaller 26 percent could now afford a (relatively more expensive) single-family home.”

The Canadian Home Builders Association says housing starts (a measure of the number of new buildings that have begun construction) have declined for two years in a row. And its CEO says high interest rates are at least part of the reason.

“Interest rates are directly reducing the feasibility of building much-needed new housing – we saw this in 2023 and it will continue in 2024,” said Kevin Lee.

A construction worker walks through a construction site.
A construction worker is pictured at a construction site in Ajax, Ontario, east of Toronto, in November. Developers surveyed by the Canada Mortgage and Housing Corporation last fall cited higher loan rates among their concerns about building purpose-built rental housing. (Christopher Katsarov/The Canadian Press)

Last fall, the Canada Mortgage and Housing Corporation (CMHC) conducted a survey of real estate developers who were building purpose-built rental housing. Three main concerns were raised: significantly higher construction costs and development fees and higher loan rates.

“More restrictive financial conditions have limited the flow of private investment into new purpose-built rental housing, leading to fewer planned projects and further fueling the affordability crisis” the CMHC report says.

A balancing act

Macklem said everyone — from potential owners to developers to policymakers — wanted the same thing.

“It’s very clear. The solution to making housing affordable is to increase supply,” he said.

But with supply and demand out of balance, Macklem said there’s little the Bank of Canada can do. And, he added, central banks really only have one tool to use.

WATCH | The Canadian real estate market is expected to remain weak for now:

A sluggish real estate market expected for the first half of 2024, but only in certain regions

The Canadian real estate market is expected to remain weak through at least the first part of 2024, while interest rates remain high. But some parts of the country will see busy markets as investors seek lower prices outside of Toronto and Vancouver, forecasters say.

“The impact of the increase in the key rate is actually to better balance the real estate market, not by reducing supply but by reducing demand and bringing it more in line with supply,” he said. declared.

Balance has been lacking in the Canadian real estate market for many years.

The good news is that most economists believe that the Bank of Canada will start cutting interest rates this summer. This should provide some relief to developers anxious to finance their next project and to homeowners struggling with significantly higher mortgage payments.

But some believe that the mere anticipation of changes in the central bank’s overnight policy rate could lead to an influx of pent-up activity in home sales.

“Data from late 2023 and early 2024 suggests that the housing market could very well recover again, as falling bond yields and mortgage rates and more favorable prices (mean) more buyers are are diverting to anticipate expected future rate cuts,” wrote Bryan Yu, chief economist at Central 1 Credit Union in Vancouver.

If so, affordability will only get worse as construction slows, even as the pool of potential buyers increases – with Canada seeing record levels of immigration last year.

WATCH | Bank of Canada Governor Tiff Macklem speaks in Montreal:

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