It’s no secret that house prices in Canada are soaring, and while the increases may mean big gains for those already in the market, there is a generation of buyers getting shut out or taking on greater risk.
“Even in mid-sized cities like London and Hamilton, the annual growth rate of house prices is eye-popping and jaw-dropping,” said professor Diana Mok of DAN Department of Management & Organizational Studies at Western University.
According to the Canadian Real Estate Association (CREA) the average house price in Canada was $748,450 in January.
With the high prices, Mok believes there is a real issue surrounding affordability brewing in our country.
“Real income has hardly increased at all when taking inflation into account. For many young people, without any support from families it is next to impossible for them to get into home ownership.”
As a result, the younger generation of buyers are being forced into riskier loans from what are considered B-lenders or even C-lenders, because they don’t qualify with the traditional banks, Mok said.
“The expensive house prices pushed a lot of high-risk borrowers into what we call a shadow banking system. How risky are these loans? We don’t know because it’s all happening beneath our noses.”
For those who are already in the market, the value of their homes has gone up – even tripled in some cases – but mortgage payments have not yet risen as fast.
“In 1996, a home at average value ($199,857) would result in a monthly mortgage payment of $1,525 at an eight per cent interest rate,” said Michael Haan, professor of sociology at Western University.
“Meanwhile in 2021, a home at average value ($639,745) would result in a monthly mortgage payment of $2,709 at a two per cent interest rate.”
The great migration
As a demographer, Haan studies immigrant settlement, labour market integration, and data development. He said despite the rise in housing costs, mid-size cities like London, Ont., are seeing a population boom which could be driven by several factors.
“In the 1990s about three quarters of all immigrants moved to Toronto, Montreal or Vancouver, but since then that number has been steadily going down.”
Baby boomer retirements could also be a factor for the migration as they look to settle down outside the big metropolitan areas.
Haan suspects this is a likely scenario, but it can’t be confirmed without a deeper dive into the numbers from the 2021 census. He noted that recent census data showed 60,000 people have moved out of Toronto alone, but who those people are is still unknown.
The third major factor in driving population up in mid-lower populated cities is the COVID-19 pandemic.
“The pandemic has just upended everything; a lot of people value outdoor and indoor space more with working from home. Why live in high density Toronto if you can have more space for a lower cost?” said Haan, adding that London still provides a better deal when it comes to housing cost compared to the bigger city centres, at least for now.
The real issue is for those living with low or fixed incomes.
“There’s a whole swath of the population finding themselves shut out of the market,” said Haan. “Once rents catch up then we’re going to see an affordability crunch, that’s what we are not taking care of.”
No end in sight
It may be too simple to say there is just not enough supply to meet demand for housing. The problem is more nuanced, said Mok.
“If the supply is trying to meet this high-price segment market, and people are holding on to expensive units, that means the supply is not being trickled down to the lower priced units,” she explained.
Meanwhile, there does not seem to be an end in sight as housing prices continue to trend upwards.
“It’s going to continue as new housing construction still hasn’t caught up and we’re continuing to see dramatic population growth, so we’re not out of this yet,” said Haan.
So, what is the risk to those desperately trying to get into the housing market?
It appears likely that interest rates will continue to increase and that may be the true test of affordability.
Mok said Canadians have historically been good at holding on to their homes, only time will tell if that will continue. “It is likely that we are going to see interest rates go up in a series of increases. Some may be able to afford to buy a house now, but can they continue to afford the mortgage payment?”