To Tackle Housing Affordability in Canada, Build More Houses
IMF Blog, October 2, 2019
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Bibliographic details
- Authors: Michal Andrle, Cheng Hoon Lim, Troy Matheson
- Published: October 2, 2019
Overview and context
- Authors: Michal Andrle, Cheng Hoon Lim, Troy Matheson
- Date: October 2, 2019
- Theme: Canada faces housing affordability challenges in major cities (examples cited: Vancouver and Toronto), contributing to record-high levels of household debt as buyers borrow as much as they can to obtain housing.
Short-term policy responses and their effects
- Policymakers often adopt politically palatable short-term fixes, including:
- Relaxing prudential regulations to enable households to borrow more (higher loan-to-income and loan-to-value ratios).
- Increasing or introducing tax-deductibility of mortgage interest-rate costs.
- Subsidizing home purchases directly.
- Key finding:
- Policies that increase households’ capacity to borrow may unintentionally raise house prices because housing supply is fixed in the short term. Increased borrowing capacity → increased demand → higher house prices → reduced affordability and higher household debt.
- Empirical comparison:
- The authors compared house price dynamics in eleven Canadian Census Metropolitan Areas with households’ ability to borrow (the “attainable” house price).
Role of interest rates and borrowing capacity
- Definition used:
- “Attainable” house price is determined using the maximum mortgage loan a household can attain from a bank given its down payment and desired level of debt service.
- Findings:
- Median house prices in most Canadian cities have tended to increase in line with households’ borrowing capacity; sometimes prices have exceeded borrowing capacity.
- Homebuyers have been able to borrow more over time due to rising incomes and a significant decline of mortgage interest rates over the past two decades.
- In Toronto and Vancouver, house prices have increased much more than implied by attainable prices, resulting in over-valuation for an extended period.
- The trend has contributed to a rise in the size of down payments as a share of income and a push towards higher loan-to-value ratios.
- Outlook:
- With mortgage rates not in decline and incomes growing slowly, borrowing capacity will be constrained, which will weigh on housing demand and bring about a decline in house prices that will improve affordability.
- Risk: the decline in house prices could be a sharp and disruptive price drop.
Supply-side strategy (policy recommendations)
- Recommendation: regional and federal authorities should collaborate on a comprehensive housing supply strategy.
- Suggested elements of the strategy:
- Accelerating the delivery of land ready for development;
- Shortening the approval process for building permits and re-zoning;
- Improving the transparency and certainty about the steps involved in the approval process;
- Ensuring development plans are time-limited to avoid construction delays;
- Re-evaluating rent control policies to improve the supply of rental properties and give households more dwelling choices;
- Assessing incentives for developers to build more purpose-built rentals with a view to encourage a more balanced mix of rental supply.
- Recent initiatives noted as constructive steps:
- Establishment of the Expert Panel on the Future of Housing Supply and Affordability;
- Expanded Rental Construction Financing Initiative to increase the supply of rental units for middle income households.
IMF blog post: To Tackle Housing Affordability in Canada, Build More Houses — Michal Andrle, Cheng Hoon Lim, Troy Matheson, October 2, 2019.
