Let’s say you’re the typical household in Canada and want to buy a home.
You earn the median household income of roughly $85,000 a year before tax and you’re looking to purchase an $800,000 home – a standard national price of late. After years of hard work and financial prudence, you manage to save enough cash for a 20 per cent down payment.
Mission accomplished, right? Not even close.
The ownership costs – monthly mortgage payments, property taxes and utilities – would eat up 63 per cent of your gross pay, according to calculations from Royal Bank of Canada.
Not only are these costs the highest that RBC has ever observed, but they are far in excess of what policy-makers deem affordable.
The math becomes even more stretched if you want a detached home or to buy in certain markets.
Ownership costs amount to 84 per cent of median household income in the Toronto area and 103 per cent in the Vancouver region. In other words, the typical household in Vancouver doesn’t earn enough to make payments on a representative home, even before taxes are deducted and other necessities – say, food – are paid for.
These are illustrative ways to describe the affordability crisis that Canada finds itself in. Practically speaking, the country’s chartered banks would never lend to someone so swamped by mortgage payments.
Still, the RBC numbers underscore a troubling trend: A typical household has little chance of getting into the housing market today. No wonder so many young buyers are tapping their parents for financial help.
In previous decades, the suburbs and smaller cities offered an affordable option for priced-out urban dwellers. But increasingly, those markets are getting swept up in the housing crisis.
Since the start of 2020, the benchmark home price has risen 89 per cent in Moncton. In Halifax, prices are up 68 per cent. And in the Ontario town of Tillsonburg (population: 16,815), prices have jumped 72 per cent. Throw in higher mortgage rates and it becomes near impossible for someone with a regular income to buy a home. The rental market doesn’t offer relief either. Tenants are facing the steepest rent hikes in decades amid high demand for a paltry number of units.
There aren’t simple explanations for how Canada ended up in this situation. Instead, a series of decisions and trends – some decades in the making, others quickly popping up – have coalesced to make homes way too expensive.
Not so high on supply
Like an upside down version of the famous Field of Dreams quote, Canada’s pace of home construction in the face of surging population is a case of they came, but we didn’t build it.
Housing undersupply is a chronic problem in Canada. But it’s become more acute since 2016, when population growth picked up in response to increased immigration targets, without a commensurate rise in housing starts. This dynamic was magnified over the past year, as the country’s population jumped by more than a million, while housing starts slowed from a 2021 peak.
As a result, affordability has gotten much worse over the past year. As Toni Gravelle, Deputy Governor of the Bank of Canada, put it in a recent speech, the widening gap “could explain why rent inflation continues to climb in Canada. It also helps explain, in part, why housing prices have not fallen as much as we had expected.”
It’s not that homes aren’t being built. Indeed, housing starts have been notably strong over the past three years, running around 20 per cent higher than the average in the years before the COVID-19 pandemic. A record number of homes, more than 350,000, are under construction. But the brisk pace of building is not enough to keep up with the country’s population growth, and there’s little evidence that the gap will close any time soon.
No vacancy
With demand for rental units outstripping supply, the rental vacancy rate has plummeted to a record low 1.5 per cent, from an average of around 3 per cent in the decade before the pandemic. That’s pushing rental costs up at a historic clip. Average rents across the country rose 8 per cent year-over-year in 2023, with much larger increases for units with tenant turnover.
The sharp decline in the vacancy rate corresponds to the surge in population over the past two years. Newcomers – immigrants, foreign students and temporary workers – tend to be renters. Meanwhile, inflated home prices and restrictive mortgage rates are forcing many would-be homebuyers to stay put, adding pressure on the rental market.
The lack of units designed for long-term tenancy and families is particularly glaring. Since the 1990s, developers have focused on condos instead of purpose-built rental buildings, which tend to have larger units and more security of tenancy. In the Greater Toronto Area, for example, almost 90 per cent of purpose-built apartments are more than 40 years old.
There’s been a pickup in purpose-built rental construction in recent years, spurred on by government incentives. But demand continues to outstrip supply. And it takes a long time to bring these buildings to market – an average of around eight years, according to Toronto’s Building Industry and Land Development Association.
Red tape headache
It can take years to get the necessary approvals for residential developments, an issue that is particularly problematic in Southern Ontario. Approval times aren’t much different whether a project has a few dozen units or a few hundred, according to a 2022 report from the Canadian Home Builders’ Association.
Moreover, project delays can lead to substantial increases in construction costs. The same report found that for every month of delay, construction costs rose by $2,600 to $3,300 a unit, another headwind for affordability.
Warped construction times
Even once the hurdles of getting approval for a new residential project are complete, that’s just one part of a lengthy process for getting new homes built. Construction timelines have grown considerably longer over the years, and have gotten worse since the start of the pandemic.
Construction of apartments takes the longest in Ontario cities, averaging 32.6 months in February, according to the Canada Mortgage and Housing Corp., up from 29.5 months for the same period five years ago. And even though construction times have risen for single and semi-detached homes nationwide, the gap between them and apartments has also grown more cavernous.
CMHC has examined lengthening construction times in its housing supply reports. Apartments are taking longer in part because they’re getting taller. In major cities, they’re also increasingly being built on smaller sites than before that involve more complex construction requirements. Meanwhile, timelines for detached and semi-detached homes have risen in part because of supply chain disruptions and labour issues.
These stretched timelines matter because they result in the delayed delivery of new housing supply at a time when it is sorely needed, while adding risk for builders, since construction loans need to be carried for longer and builders are exposed to construction cost inflation for longer, according to a February report released by Building Industry and Land Development Association, an organization that represents Toronto home builders.
Output obstacles
The construction industry has a productivity problem. Output in the sector is back to where it was in the late 1990s, and the gap with the overall economy is growing.
There are particular issues facing the industry, CMHC deputy chief economist Kevin Hughes noted in a recent blog post. The building process is complex and varies by building type, and many aspects of production fall outside of the developer’s control, which can lead to delays. Moreover, the residential construction industry is quite fragmented and includes small players who focus on bespoke projects, but also lack the capital to make investments that would boost their productivity.
It’s not an easy problem to fix, although governments could offer incentives to builders who use more prefabricated inputs. The use of off-site construction could speed up completion times.
2x4 inflation
From wood and concrete to steel and glass, residential construction materials have soared in price compared to before the pandemic, ending years of steady and predictable cost increases. On a national basis, construction costs have jumped nearly 60 per cent since the end of 2019, and are up 80 per cent since 2017, far outpacing overall inflation.
The cost surge has directly fed into rising home prices, but has a knock-on effect because municipal governments also tie the fees they charge developers to Statistics Canada’s construction price tracker. In Toronto, for instance, development charges for a one-bedroom rental apartment jumped 22 per cent last year from 2022, and 42 per cent for a non-rental one-bedroom apartment. Add in rising wages for construction workers, which have outpaced the overall job market, and it helps explain why housing starts have slowed sharply even as politicians promise a rush of new housing to meet demand.
Bank of Canada rains on the parade
Canadians are used to seeing eye-popping house prices, especially in Toronto and Vancouver. What’s new is the rapid run-up in mortgage rates over the past two years, as the Bank of Canada tightened monetary policy to fight inflation. This combination – pricey homes and restrictive mortgage rates – has transformed a long-simmering housing affordability issue into a thoroughly middle-class problem.
Existing homeowners are seeing monthly mortgage payments jump by thousands of dollars when they renew. Would-be buyers are shut out of the market, unable to qualify for a mortgage at higher rates.
Around half of all homeowners with mortgages have renewed since the central bank began raising rates in 2022. Most of the rest will do so in the next two years. Homebuyers who overstretched in 2020 and 2021, when interest rates were at historic lows, are in for a particular big shock.
There’s hope the Bank of Canada will start lowering interest rates this year, with analysts betting on a first cut in June or July. But central bank officials remain cagey, and Governor Tiff Macklem has warned that rates are unlikely to fall as fast as they rose.
Priced-out millennials
Young Canadians are managing to buy homes, although not to the same extent as before. And because homes are so expensive, young buyers often rely on their parents’ wealth to get into the market.
In November, a Statistics Canada report found that adult children of homeowners were more likely to own a home than those whose parents were non-homeowners, and this likelihood increased with the number of properties owned by their parents. The children of multiple-property owners have lots of social capital, access to quality education and wind up in higher-paying jobs, on average.
“However, the analysis establishes a robust positive relationship between parents’ property ownership and the likelihood of home ownership for their adult children, even when controlling for income, age and province of residence,” the report read. “Inequality of home ownership appears to be reproduced across generations as parents’ property ownership conveys significant financial advantages to their children.”
Seniors staying put
Over the past decade of rising house prices, anticipation has built around the idea that a wave of aging baby boomers will sell their homes and flood the market with new supply. That isn’t happening. Instead, more seniors are aging in their houses longer, a November report by CMHC found. The sell rate of homeowners aged 75 or older who sold their homes has fallen steadily since the early 1990s, dropping to new lows in the 2016 to 2021 time period.
If there is a seniors’ sell-off coming, it won’t be any time soon. The report found the sell rate among those aged 75 to 79, the leading edge of the first wave of baby boomers, was 21.5 per cent. Sell rates didn’t rise significantly until people were in their late 80s and into their 90s, when rates rose to 55.3 per cent to 72.4 per cent.
Of course, even if seniors did start selling en masse, it might not help much. Last month Statistics Canada reported that millennials now outnumber baby boomers in Canada, thanks to the influx of permanent and temporary immigrants.
Note: RBC’s affordability calculations use a five-year fixed-rate mortgage amortized over 25 years. The mortgage rate is the weighted average of those offered by chartered banks for insured and uninsured mortgages. RBC uses benchmark home prices from RPS Real Property Solutions, and it adjusts Statscan income data for timeliness. The bank assumes the buyer makes a 20 per cent down payment.
Housing has become one of Canada’s most vexing and all-consuming quandaries. This article is part of a Globe and Mail series that examines the country’s affordability crisis, its myriad causes and prospective solutions.
Jason Kirby
Matt Lundy
Mark Rendell