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The price of the average house in Canada has increased faster than people’s capacity to borrow, according to an analysis by the Parliamentary Budget Officer, who is warning that financially stretched homeowners may be especially vulnerable to rising interest rates.

While the report, released Thursday, may not come as a surprise to anyone who has looked for a house in the country’s most desirable cities, it contains striking figures.

The price for the average house in Canada nearly doubled over roughly seven years, the PBO notes, rising 97 per cent from January, 2015, to the end of 2021. And in December of last year, average house prices in the census metropolitan areas (CMAs) of greater Halifax, Hamilton, Ottawa and Toronto were all more than 50 per cent above what the PBO considers affordable levels.

House prices in several CMAs were already above affordable levels prior to the pandemic, the PBO writes. “With further increases in house prices over 2020 and 2021, affordability continued to deteriorate in these CMAs, with the average household stretching its finances even further.”

The PBO defines “affordable” in terms of borrowing capacity. An affordable home, in the office’s analysis, is one that an average buyer can finance using the same or a smaller percentage of their total income than they would have used, on average, to buy a similar home in the period between 2012 and 2014.

Hamilton was the least affordable city studied, with prices there nearly double what the average household could reasonably manage. Toronto was next, at 78 per cent above the affordability threshold. On the other end of the scale, Edmonton was the most reasonably priced of the studied cities, with house values 20 per cent below what would be considered affordable. Homes in Calgary and Quebec City were roughly in line with borrowing capacity.

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UBC assistant professor Paul Kershaw, founder of Generation Squeeze, a group that advocates for inter-generational fairness, said that soaring costs are making increasing numbers of young people give up on ever owning a home.

“That is no small dream to abandon in a Canadian cultural context that has historically actually often viewed home ownership as a sign you’ve made it as an adult, as a successful adult,” he said.

Benjamin Tal, deputy chief economist at CIBC World Markets, said that while it is difficult to extrapolate from average prices, there is no doubt that many Canadian homeowners are financially stretched. And he warned that the Bank of Canada has a delicate task before it, as it determines its monetary policy.

“The number one enemy of the housing market is not higher interest rates, it’s rapidly rising interest rates,” he said. “I think that the most significant story here is that interest rates are going to rise, and as a society we have never been so sensitive to the risk of higher interest rates.”

The cost of housing has become a hot topic for political debate over the past few years, as home price gains have far outstripped increases in income.

Politicians, housing advocates and economists have proposed many ideas for making housing more affordable. Some favour incentives such as assistance to new buyers, which critics say will only push up prices. Others have spoken about the need to make it easier to build homes and densify cities, which can be unpopular among existing homeowners.

Earlier this month, a housing task force struck by the Ontario government issued dozens of recommendations for addressing housing affordability, including loosening municipal zoning rules to allow for up to four units and four storeys on any residential lot in the province. The government, which is not bound by the recommendations, is facing a re-election campaign this spring.

There have also been calls to make it harder for institutional investors – who now make 20 per cent of home purchases across Canada – to compete with people buying homes in which to live. But federal Housing Minister Ahmed Hussen recently told The Globe and Mail that the government won’t risk hurting “mom and pop” real estate investors.

“Small-time landlords do add to the rental stock,” he said. “They provide rental stock to Canadian families and individuals. And so we don’t want to negatively affect them because they are actually providing a rental service to a lot of people.”

As the debates have continued, the price of housing has kept climbing. And according to the analysis, the situation is not expected to improve in the short term.

“Interest rates are expected to rise and growth in household income is projected to moderate over the medium term,” the PBO writes.

With a report from Rachelle Younglai

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