Yahoo Finance Housing affordability won’t return to pre-pandemic levels in the next two years: Desjardins
Housing affordability in Canada will not return to pre-pandemic levels in the next two years, according to Desjardins’ latest housing outlook, even if economic weakness weighs down home buying activity.
“Even with our forecast for a mild recession, an eventual reduction in interest rates and modest price gains, we don’t anticipate a return to pre-pandemic affordability levels within the next two years,” Desjardins principal economist Marc Desormeaux wrote in report released on Tuesday, adding “that primarily reflects a very unaffordable starting point.”
“It’s also important to highlight that while periods of softer economic activity do tend to result in weaker home price growth, they also mean poor income growth. Moreover, while we expect mortgage rates to come down from current levels over the next two years, they won’t likely reach the rock-bottom levels of the pandemic or the early 2010s.”
Home price rebound ahead
Economists widely expect that the Bank of Canada is done hiking interest rates, and will begin cutting at some point later this year. But lower borrowing costs won’t necessarily result in improved affordability. Lower interest rates are expected to bring prospective home buyers off the sidelines, resulting in a broad-based rebound in home prices in the second half of 2024 that will carry into 2025, Desjardins said. The strongest rebounds are expected in Toronto and Vancouver, “as they tend to be more responsive to interest rate movements.”
Higher interest rates, strained housing supply and surging population growth has resulted in stubbornly high house prices as well as rising rents in Canada. While governments have recently started to focus on ways to boost housing supply in Canada, Desormeaux noted that new builds take time to come to market.
“We also still expect residential construction activity to slow meaningfully this year across the country,” Desormeaux wrote in his report.
“Labour shortages, very weak homebuilder sentiment, and still-high interest rates and building costs all point to much weaker construction activity going forward.”
While a more severe recession that Desjardins is currently projecting would result in reduced home prices relative to baseline expectations, it would also result in reduced income available to buy a home.
Foreign student cap 'bold move' but insufficient
CIBC economist Benjamin Tal said in a research report released on Tuesday that “current recessionary conditions in the Canadian housing market will hardly dent the affordability crisis home buyers and renters currently face.”
“After years of half measures, governments at all levels are showing clear determination to aggressively tackle the issue,” Tal wrote, adding that the recent cap on the number of foreign students allowed into Canada “is a bold move in the right direction but it is insufficient.”
“The housing shortage issue is largely a planning issue with official planning targets falling notably short of actual population growth. You cannot build an adequate supply of housing for population growth that you fail to forecast.”
Tal said that even with the cap on international students, the strong pace of growth of other non-permanent residents entering Canada would keep population growth closer to 2 per cent annualized, which would represent about 6 million additional arrivals over the next seven years. He estimates that Canada would need about 5 million housing units to restore affordability by 2030, well above the 3.5 million units projected by the Canada Mortgage and Housing Corporation (CMHC) in 2022.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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