There is a lot of information about housing affordability out there, and not all of it is accurate. We’ve compiled the most common myths and answered frequently asked questions.
Myth: If house prices fall, it means affordability is improving.
The over 60 changes to mortgage rules since 2009 have slowed or lowered housing prices in many markets, but this has not improved affordability. This lowering of prices is from artificially suppressed demand – the result of locking out well-qualified first-time homebuyers. Houses are not more affordable if their price is lower because mortgage rules now declare people can’t buy them.
Affordability is made up of three factors: house prices, mortgage rules, and income. Truly addressing affordability is not as simple as cutting out a percentage of the market to reduce the number of prospective buyers and making prices (and homeowners’ equity) fall. When prices drop because tens of thousands of millennials have been locked out of the market due to mortgage rules, that’s not improved affordability – it’s decreased affordability. The result is market instability, pent up demand, lowered homeowner equity, faltering local economies, and a whole generation of young and new Canadians with their financial futures hampered.
Myth: Changes to the stress test and mortgage amortizations will drive up housing prices
Purchasing a home is a good investment in Canada – homeowners and prospective buyers want their investment to appreciate at a reasonable rate over time. But that appreciation should be slow and steady to keep housing affordable so that when it’s time to sell, someone else can buy your home. That’s the balance we need.
Recent projections by CMHC suggest a return to 30-year insured mortgages for first-time buyers would only increase prices by 1% – 2.4% (the regular rate of inflation), while dramatically improving affordability and returning tens of thousands of well-qualified borrowers to the market. Similar results can be achieved with a well restructured stress test. One to two percent growth would be natural price appreciation, while tens of thousands of young Canadians would be able to responsibly enter homeownership without undue risk to themselves or Canada’s financial system.
Aren’t federal policies helping Canadians avoid excessive household debt? Wouldn’t changes increase borrowing (debt)?
CHBA recognizes that Canadians are carrying increasing consumer debt. However, mortgage debt is less precarious than other forms of debt (like car loans or cell phones), and is an investment, especially for younger first-time homebuyers.
Further, young Canadians manage debt very well and are very low risk. Canadians under 35 are at the lowest risk of falling into mortgage arrears: according to CHMC analysis of Equifax data, the delinquency rate for 25-34 year olds is 0.26%. (The average is 0.29% across all ages.) They also have their whole working lives ahead of them to pay down their mortgage, while their incomes increase over time.
The current blanket “stress test” does not recognize this fact, and current mortgage rules also fail to see the importance of homeownership as a key to individual financial security.
If too many people take on big mortgages, interest rates stay low, and house prices keep rising, aren’t we at risk of a housing crash?
While low interest rates were a factor in the U.S. 2008 Great Recession, they were not the only factor. Nor were house prices. The U.S. system was (and still is) very different than Canada’s. Canada’s financial system is ranked near the top globally. Canada has robust market fundamentals – including strong mortgage underwriting practices and stricter banking regulation – that would make it very difficult for the same thing to happen in our country. It is essential to balance fiscal prudence with access to homeownership for Canadians who value it.
I keep hearing that there are way more new condos than needed. How can you say we don’t have enough housing supply?
Empty condos and unsold units are the result of two things: a mismatch between what homebuyers want to live in and the real impact of the stress test settling in. Buyers are now struggling to close the financing on homes they agreed to purchase before the stress test requirements came into effect last year; well-qualified buyers, with income and a down payment, are suddenly finding they are no longer financially “good enough” to realize their dream of homeownership.
If people can’t buy a house, isn’t renting a good choice?
Renting may be the preferred choice for some people, and that’s okay. But 4 in 5 renters want to purchase their own home, and when they can’t we see a trickle-down effect. The stress test is preventing responsible and qualified homebuyers from entering the housing market, which clogs up the rental market. Over 80% of rental stock that becomes available each year comes from first-time homebuyers leaving the rental market. Right now, that is being stagnated, causing rental shortages and higher rent, and fewer units available for Canadians in housing need.