According to a new research from RBC, restoring affordability will require years and concerted efforts, barring a housing catastrophe that would “destroy property values” in Canada. The second-quarter housing affordability report outlines some terrible circumstances across the nation and cautions that “any progress in restoring housing affordability is likely to be slow.”
Unfortunately, Canada’s housing affordability appears to be declining in the third quarter. In many of Canada’s major areas, buyers will still have to deal with extremely challenging affordability conditions in the interim. With the probable exception of Prairie markets (particularly Calgary), where buyer confidence appears to be robust at this point, the dramatic erosion of affordability during the pandemic would likely limit demand in other regions of Canada as well.
Any progress toward restoring home affordability is likely to be gradual, barring a housing crisis that would obliterate property values or an unanticipated shift in monetary policy.
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To make a significant difference, supply must skyrocket. However, the process of creating new residences is lengthy—up to several years in the case of sizable condominium apartment complexes. Additionally, with rising construction costs and limited construction capacity, it is become harder to develop homes that most Canadians can afford.
From RBC report we can read that Canadian affordability issue will not be fixed any time soon with keeping mortgage rates at current level. But what needs to be done then?
We have seen what cheap mortgage rates have done to Canada! Cheap borrowing rates have created a mirage of wealth and homeownership, prices skyrocketed, people have borrowed more money from the banks, banks own now more land and properties than ever and with increasing mortgage rates, Canadians are struggling to pay those mortgages off. So, now what? It would be ridiculously unethical and irresponsible to lower mortgage rates and boost the home prices even more!
The only way for housing affordability to be regulated and for homes to be actually made for living instead of being here for investors to make money is raising interest rates until the prices come down quickly to affordable level. Investors will loose money, investing into housing would be loosing task and this way houses will be build for purpose of living in them instead of buying and renting out or reselling it.
Now this working outcome is not something government wants either, think about lost money from property taxes and land transfer taxes and so on. The more expansive houses are the more money government can collect and earn. Banks profit from high prices tremendously, higher the prices the longer borrowers need to pay off their mortgages and this way bank earnings increase.
So what is the incentive for government and banks to lower prices?
Slim to none! Banks fear housing crash as they could potentially loose on foreclosures, even though this might not be a loss for them either, depending on their calculations, reselling value of properties etc. Government could face less in taxes, less homeowners, less infrastructure projects and negative economy stimulus.
Again, these are common sense calculations and predictions, yet, the actual outcome and decision could be way different. Again, depending on money maker wants and needs, business to government donations and famous lobbying.
Bottom up change could be done only at the day of elections.
Next elections in Canada:
Alberta – Provincial – 29.May.2023
PEI – Provincial – 03.April.2023
Manitoba – Provincial – 03.October.2023
Nunavut – Municipal – 23.October.2023
Or if you could afford to wait, next Federal elections are scheduled for 20.October. 2023.
At the end, it doesn’t really matter on what side of the affordability issue you are on, as investor who hopes for higher ROI or Canadians who can’t afford to live in Canada any longer, this inflated housing market is a ticking time bomb. People will be hurt in the process and someone allowed this to happen.