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Canada’s real estate market has been marked by persistent instability, witnessing a surge of over 35% in home prices within four years and a 30.9% year-over-year increase in mortgage interest costs. And as rental prices reach new highs across the country, calls for intervention grow larger. 

The Bank of Canada’s Governor Tiff Macklem asserts that the housing crisis won’t be solved with a one-size-fits-all solution. Macklem states that the central bank can’t solve the housing crisis with interest rates because the root problem is Canada’s housing supply shortage.

Citing issues such as zoning restrictions, availability of skilled workers, and approval process delays. Leading Canadians to raise questions about the efficacy of interest rate adjustments in tackling the on-going housing affordability crisis.

Why Is Housing Supply Falling Short Of Demand? 

The growing gap between housing supply and demand in Canada is rooted in several key problems. Zoning restrictions, lack of skilled workers, and delays in approval processes collectively contribute to the supply shortage in Canada.

Zoning Restrictions

Zoning restrictions are a significant barrier in the construction of housing supply relative to demand in Canada. These zoning regulations dictate how land can be used and often have many restrictions on residential development. Strict zoning regulations, which vary across municipalities, limit the construction of affordable housing. Leading to a delay of available and affordable homes. 

This, in turn, intensifies affordability issues, especially in regions where the cost of housing is already high, take for example Vancouver and Toronto. As a result, zoning restrictions have become a focal point in discussions about devising more effective and flexible urban planning policies that align with the evolving needs of growing communities.

COVID-19 

During the pandemic, emergency low-interest rates were implemented to stabilize the economy. This inadvertently contributed to a surge in home prices.

As people sought to take advantage of favourable borrowing conditions, the heightened demand further strained an already tight housing market. This spike in home prices worsened the affordability issues. 

Shelter Inflation

While many think that lower interest rates will help the housing affordability crisis, it doesn’t solve the root problem: housing supply. In fact, policies that stimulate demand can worsen the situation. 

For example, lowering interest rates drives up demand, which in turn causes home prices to increase. This phenomenon is known as “shelter inflation”. 

As such, while high-interest rates make it more expensive for consumers to get a mortgage and developers to build more homes, lowering interest rates isn’t the answer either. 

Due to this complex conundrum known as “shelter inflation”, Canada requires housing policies that go beyond the monetary side of things.

Alpine Credits

Why Interest Rates May Be Contributing To The Housing Crisis

While Mr.Maclem agrees that high-interest rates increase housing costs, he argues that shelter price inflation continues to rise even during periods of low-interest rates. 

However, the Canadian Home Builders’ Association states that high-interest rates are one of the reasons housing projects have decreased over the past two years. The CMHC agrees and notes that increased lending costs paired with rising construction costs and development fees have only intensified the problem. 

Moreover, the CMHC reports that these financial restrictions, including high-interest rates, are limiting “private investments into new purpose-built rental housing, [which is] resulting in a decrease of planned projects and further fueling the affordability crisis”

Canadian Ability To Afford A Home Has Fallen

According to assistant chief economist, Rober Hugue, 60% of all households could afford at least a regular condo apartment based on their income in 2019. Now in 2023, this number stands at only 45%. The decline is even more striking for single-family homes, where only 26% of households are now able to afford housing options.

Moreover, as mortgage interest rates and home prices began to rise, so did rental prices. Similarly, rental vacancy rates have also hit record lows, causing Canadians to struggle with securing housing that aligns with their financial capacity.

Final Thoughts

In the face of rising housing demand and low supply, Canadian renters and homeowners face a similar challenge. It’s evident that addressing the issue requires new and adaptive strategies beyond interest rate adjustments.

Navigating this housing challenge demands a comprehensive approach, addressing regulatory constraints, labour market dynamics, and community-specific needs to foster a more balanced and accessible real estate landscape.

Maidina Kadeer, BA avatar on Loans Canada
Maidina Kadeer, BA

Mai Kadeer is a graduate of Concordia University, with a BA in English Literature, with a minor in Law and Society. Mai was a student strategist on the Concordia University Senate (2016), through the Academic Planning and Priorities committee. She has a background in financial budgeting as a board member for non-profit organizations, such as the Quebec Public Interest Research Group and the Concordia Food Coalition. For the past five years, Maidina has worked as a content specialist. Mai is passionate about helping Canadian consumers with financial management and literacy so they can make informed decisions regarding their personal finance.

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