A report from RBC Capital Markets has warned that housing affordability in two key Canadian markets is irreparable.
The report, prepared by Geoffrey Kwan and entitled RBC Capital Markets Canadian Housing & Mortgage Virtual Conference Recap, which was sent to True North, included the ominous warning.
“Fixing housing affordability, particularly in Toronto and Vancouver, is likely past the point of no return; housing activity remains weak, but is showing early signs of improvement as year-over-year comparisons improve through 2023,” Kwan’s report read.
As the Bank of Canada (BoC) began considerable hikes to its Overnight Lending Rate last year, homebuying activity softened and relieved upward pressure on prices. However, not even that was enough to bring home prices down to affordable levels; in fact, in tandem with higher rates resulting in elevated monthly carrying costs, housing arguably became even less affordable.
In Vancouver, Robert Mogensen, a broker with The Mortgage Advantage, says affording a $500,000 condominium—a rare find anywhere in the metropolitan region—requires household income of $125,000 to meet the 5% minimum down payment, but commonplace in the city are people who make less than that.
“I see a lot of clients who make half that or less than half of that, and they’re regular working people. There’s no hope in hell they can afford their own condominium, let alone single-family housing,” Mogensen told True North.
“The payment on a $500,000 condo at a decent market mortgage rate is $2,900 a month, and then you have strata fees and property taxes on top of that, so who has that kind of disposable money for living expenses? It’s just off the charts. Is the housing market so broken that it can’t be fixed? At this point in time, I 100% agree with that.”
According to the latest statistics from the Real Estate Board of Greater Vancouver, the benchmark price of a Metro Vancouver home was $1,188,000 in May. A detached home was $1,953,600 while condos were significantly less expensive, albeit not necessarily more affordable, at $760,800.
Many homebuyers in the city leverage existing home equity to move up the housing ladder, but most of the city’s younger residents aren’t as fortunate.
They’re hardly the only ones vying for housing at the lower end of that ladder, and that fierce competition is driving prices up from the bottom up.
“With the influx of people coming into areas like Vancouver and Toronto, and without that supply being replenished, conditions will get tighter and tighter and tighter,” Mogensen continued. “We’re seeing multiple offers again on condos with 20-30 people going through open houses and making offers in subsequent days.”
The latest data made available by the Toronto Regional Real Estate Board revealed similar circumstances in Canada’s largest metropolitan region. In May, the benchmark price of a home was $1,196,101, and according to Tom Storey, a broker with Royal LePage Signature Realty, Kwan’s statement is an opposite representation of what affordability looks like locally.
“Especially if you just look purely at what the income is and what people can afford to buy in these major markets,” Storey said. “I’d say we passed the point of thinking we could get back to affordable levels a long time ago.”
He added that smaller markets, too, are experiencing mounting affordability woes. The BoC’s quantitative easing (QE) program during the pandemic, which essentially made borrowed money free relative to asset appreciation, was the impetus for a housing rush in far-flung Halifax. Storeys says locals unaccustomed to such market realities naïvely believe home prices will return to pre-pandemic levels.
But home prices won’t return to healthier levels in Halifax, and they certainly won’t in Toronto.
The balance, or lack thereof, of supply and demand governs market behaviour, and influencing the latter is access to capital, which was made easy in response to the Great Recession, plunging lending rates to prolonged record lows.
That, in turn, sparked the housing rush that has turned homeownership into the domain of the affluent, subjugating the rest to an historically tight, and unpredictable, rental market, wherein renters spending up to half their monthly income on shelter is common in Toronto and Vancouver.
“Most people in Canada buy homes with a mortgage, and having the ability to go to a bank and put down as little as 5% if you buy under $500,000, can get you a mortgage and a property. A lot of other places in the world don’t have that access,” Storey said.
“Our access to capital isn’t going away, but as interest rates go up, so is the stress test.”
The B-20 mortgage stress test, in its present incarnation, was announced by the Office of the Superintendent of Financial Institutions in Oct. 2017, and stress tests mortgage originations at a floor rate determined by the central bank’s overnight lending rate, or 2% above the borrower’s qualifying rate—whichever is greater.
Qualifying for a million-dollar mortgage is hard enough, but doing so in a rising interest rate environment is downright impossible for more Canadians than ever before.
The stress test, however, was introduced to avert a financial calamity similar to the one in 2007-08 when interest rates invariably rose.
But B-20’s implementation wouldn’t have been necessary in a country in which housing prices remained tethered to domestic incomes. Juxtaposing surging homeownership prices with wage growth, the latter has effectively been static.
“Even though prices are lower [because of roughly a year’s worth of subdued market activity], mortgage rates are higher,” Storey said. “Home prices coming down is one thing, but the true cost of ownership on a monthly basis is another conversation.”
Both Mogensen and Storey cite Canada’s elevated immigration numbers—which excludes annual permit workers entering the country—as the main reason for runaway housing prices, which both conclude cannot plunge to reasonable levels so long as such policies exist.
There are many ways unaffordable housing affects cities, one of which, Mogensen says, is hostile conditions for young people, who feel they have no other option, spur them to search further afield for better cost of living standards.
“It sucks the vitality out of a city because, as things get progressively more expensive, you’re left with a well-heeled, older generation who may not have mortgages at all because they’ve owned their properties for a long time, but the creative younger generation who work in the arts or service industry—the people who make cities vibrant—you won’t see them,” Mogensen said. “It’s turning Vancouver into a haven for rich older people.”
Vancouver’s runaway housing prices are primarily a ramification of foreign capital that began pouring into the city when China’s repossession of Hong Kong was imminent. Mogensen says the problem has since festered—and citing Kwan’s report, he added that housing affordability in Vancouver is past the point of no return.
“Nobody saw it as a problem back then, and it just went on and on and escalated in a huge way with no end in sight,” he continued. “Now we’re in a predicament where only the wealthy can afford homes, even modest places, and I don’t know how you can unwind that.”
