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

Canada’s real estate market is known to be turbulent. Home prices have risen by more than 35 percent in just four years. Mortgage interest costs rose 30.9 percent year-on-year. Rental prices are constantly reaching record levels.

With inflation under control, there is a growing chorus calling for the Bank of Canada to lower interest rates, and ease at least some of the affordability issues.

But Bank of Canada Governor Tiff Macklem says a lower interest rate is not the magic solution people are hoping for.

“Housing affordability is a big problem in Canada, but it’s not a problem that can be solved by raising or lowering interest rates,” Macklem said. During his speech in Montreal Tuesday.

The real problem, Macklem said, is that housing supply has been below housing demand for years.

“There are many reasons for this: zoning restrictions, delays and uncertainties in approval processes and shortages of skilled workers. Monetary policy cannot address any of these things,” he said in his speech to the Montreal Council on Foreign Relations.

Macklem acknowledges that emergency low interest rates during the COVID-19 pandemic helped drive home price appreciation during that period. Research by the central bank shows that “shelter inflation” continues to drive inflation.

Lower housing starts are due to higher interest rates

Rental and owned housing prices are expected to continue growing above the pre-coronavirus pace after the end of 2024, said Randall Bartlett, senior director of Canadian economics at Desjardins.

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

An apartment building with a sign saying "Stop raising rents" Hanging from the balcony.
Rental and owned housing prices are expected to continue to grow above the pre-coronavirus pace after the end of 2024. Median rent across Canada has reached all-time highs, with particular pressure in hot spots like Vancouver and Toronto. (Patrick Morrell/CBC)

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

RBC Economics has what is called an “overall affordability measure”. By the end of last year, that index was “at or near the worst affordability levels on record 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 a standard apartment in 2019 based on their income. This share fell to 45 percent in 2023,” Assistant Chief Economist said. Robert Hogg wrote in a paper Released in December.

“And an even smaller 26 percent can 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 starting construction) have declined for two years in a row. Its CEO says high interest rates are at least part of the reason.

“Interest rates directly reduce the viability of building the supply of much-needed new housing – we saw that in 2023 and it will continue in 2024,” Kevin Lee said.

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

The Canada Mortgage and Housing Corporation (CMHC) surveyed developers building purpose-built rentals last fall. Three main concerns have been raised: skyrocketing construction costs, development fees, and high lending interest rates.

“More constrained financial conditions have limited the flow of private investment into new rental housing, resulting in a decline in planned projects and increasing the affordability crisis.” The CMHC report said.

Balanced action

Everyone — from potential homeowners to developers to policymakers — wants the same thing, Macklem said.

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

But while supply and demand are out of control, Macklem said there’s only so much the Bank of Canada can do. He said central banks only have one tool to use.

watched The Canadian housing market is expected to remain weak for the time being:

The affordable housing market is expected to emerge in the first half of 2024, but only in some parts

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

“The effect of raising the interest rate is actually to better balance the housing market, not by reducing supply but by reducing demand and bringing it more in line with supply,” he said.

Balance is something that has been missing from the Canadian housing market for many years.

The good news is that most economists believe the Bank of Canada He will start cutting interest rates this summer. This should provide some relief to developers who are concerned about financing their upcoming projects and to homeowners suffering from skyrocketing mortgage payments.

But some believe the mere anticipation of changes to the central bank’s key overnight lending rate could trigger a flood of pent-up activity in home sales.

“Data from late 2023 and early 2024 suggest the housing market could rebound again as lower bond yields and mortgage interest rates and more favorable rates (mean) more buyers jumping off the sidelines into expected future interest rate cuts,” he wrote. “. Brian Yu, chief economist at Central 1 Credit Union in Vancouver.

If so, affordability will get worse as construction slows, even as the pool of potential buyers swells — Canada saw record levels of immigration last year.

watched Bank of Canada Governor Tiff Macklem speaking in Montreal:

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