Bank of Canada says housing affordability is about boosting supply, not lowering interest rates
CBC
Canada's real estate market is notoriously unhinged. Home prices are up more than 35 per cent in just four years. Mortgage interest costs are up 30.9 per cent year over year. And rental prices are continually hitting record highs.
As inflation comes under control, there is a growing chorus calling on the Bank of Canada to cut interest rates, easing at least some of those affordability issues.
But Bank of Canada governor Tiff Macklem says a lower interest rate isn't the silver bullet people are hoping for.
"Housing affordability is a significant problem in Canada but not one that can be fixed by raising or lowering interest rates," Macklem said during a speech in Montreal on Tuesday.
Macklem said the real issue is that housing supply has fallen short of housing demand for years.
"There are many reasons why: zoning restrictions, delays and uncertainties in the approval processes and shortages of skilled workers. None of these are things monetary policy can address," he said in his address to the Montreal Council on Foreign Relations.
Macklem admits the emergency low interest rates during the COVID-19 pandemic helped fuel the run-up in home prices during that time. And the central bank's own research shows that "shelter inflation" continues to drive inflation.
Randall Bartlett, senior director of Canadian economics at Desjardins, said prices for both rented and owned accommodation are projected to continue growing above their pre‑COVID pace beyond the end of 2024.
"One of the key takeaways from the Bank of Canada's January 2024 Monetary Policy Report is that shelter inflation is likely to be the single most important driver of year-over-year price growth in the first half of 2024," he wrote in a research note.
The issue of affordability is not a new one in Canada. But it has accelerated in recent years.
RBC Economics has something called the "aggregate affordability measure." By the end of last year, that index was "at or near worst-ever affordability levels in many markets," with particular concerns in hot spots like Vancouver and Toronto.
"Close to 60 per cent of all households could afford to own at least a regular condo apartment in 2019 based on their income. That share has plummeted to 45 per cent in 2023," assistant chief economist Robert Hogue wrote in a paper released in December.
"An even tinier 26 per cent could now afford a (relatively more expensive) single-family home."
The Canadian Home Builders' Association says housing starts (a measure of how many new buildings have begun construction) have fallen for two consecutive years. And its CEO says high interest rates are at least part of the reason.
