Following the Bank of Canada’s third consecutive cut to the overnight lending rate this year, reducing it by another 25 basis points in September to 4.25 per cent, Canada’s housing market should see an increase in activity this fall and continue into next year.

For consumers, the drop is a positive sign that we’ve moved past the peak of high lending rates, and with further rate cuts expected, many sidelined buyers will feel confident enough to re-enter the market amid more favourable borrowing conditions. But is it enough to make a material difference in the budgets of first-time buyers?

Several hurdles besides borrowing costs: Saving for down payment, passing stress test & finding the right property

High interest rates are just one of several financial hurdles that first-time buyers have to overcome. In addition to the high cost of borrowing, saving for a down payment — which is difficult to do when rental rates are high — plus passing the stress test to qualify for a mortgage and finding an appropriately-sized property in a desirable region within their price range pose a significant challenge. More supply — most importantly, the right type of supply — is needed to help young families achieve their goal of homeownership.  

While there are government initiatives targeted at helping people save and making lending practices more favourable for the next generation of buyers, such as allowing Canadian lenders to offer 30-year amortizations for insured mortgages of new construction homes, more needs to be done to incentivize development and make the construction of new homes easier, faster and more affordable for builders.

This is especially true in the country’s most expensive and densely-populated markets, where high construction and borrowing costs remain a major barrier for developers. Without further intervention from the government, new construction will continue to decline in the coming years. 

Increase in inventory required to make homeownership attainable

While home prices have remained stable in most markets this year and declining interest rates are making owning a home a bit more accessible to some buyers who have been waiting in the wings, we cannot afford to take the spotlight off the bigger issue: there are still too few homes for our growing population.

We’re approaching the intersection of declining interest rates and home price appreciation. If activity picks up in the months ahead, we’ll reach a point where the increased affordability offered by lower borrowing costs is outweighed by price gains due to increased competition.

According to a 2023 report by the Canada Mortgage and Housing Corporation (CMHC), Canada needs to build approximately 3.5 million additional housing units by 2030 in order to restore affordability. However, experts have refuted this figure, citing that with continued population growth, hundreds of thousands more homes will be required.

For first-time buyers, a difficult choice looms: whether to transact now or hold off until further rate reductions are announced.

As sidelined buyers gradually return to the market, an increase in demand could trigger a sudden uptick in competition, resulting in home price appreciation. Cautious buyers are likely to enter the market sooner than later — while competition is low and inventory is building — while those with a higher risk tolerance will opt to continue to wait for further rate decreases. The fact remains that young Canadians should not be forced to “time the market.”

Young Canadians prioritizing homeownership

Despite higher home prices and borrowing costs having been prohibitive to young Canadians looking to enter the market in recent years, there’s still a strong desire to own a home.

A recent Royal LePage survey found that 84 per cent of Canadians belonging to the adult Generation Z and young Millennial cohort — those aged 18 to 38 or born between 1986 and 2006 — believe that homeownership is a worthwhile investment, and they are committed to achieving this goal. For many, this means making significant lifestyle adjustments, whether it be cutting back on expenses or postponing major life milestones. 

Our country’s ongoing and worsening housing supply shortage needs to be addressed immediately

Young Canadians are not only cutting back on discretionary spending (travel and entertainment, for example) but also making financial decisions that could impact their long-term stability, such as delaying education or saving for retirement, as well as other significant investments.

If there was any doubt, this should serve as further proof to policymakers and regulators that our country’s ongoing and worsening housing supply shortage needs to be addressed immediately. While the dire need for more housing inventory grows ever more crucial, the financial stability and future opportunities of young Canadians are being impacted.

It’s quite clear that young Canadians are eager to transition from renting to owning their own home, securing their place on the property ladder as their parents did. While reduced interest rates can help make homeownership more attainable for first-time buyers, this is not the only solution to the larger, more complex challenges within Canada’s real estate economy. 

Last month, the Government of Canada released its 2023 Fall Economic Statement, an annual fiscal report that provides an update on the state of the Canadian economy and the government’s plans for future spending. This year’s statement had a strong focus on ways to tackle Canada’s housing affordability and supply crisis.

The statement revealed plans to allocate billions of dollars to increasing housing affordability and accessibility across the country, including the creation of more public housing, incentives for developers to build much-needed rental inventory, measures to reduce short-term rentals as well as recommendations for financial institutions to provide Canadian borrowers with mortgage relief options upon renewal.

Urgent need to address housing shortage for first-time buyers and middle-income earners

While it is imperative to ensure low-income residents have access to public and affordable housing options, millennials — the largest portion of our population — are also greatly impacted by the current housing crisis. It has become increasingly difficult for young Canadians with decent-paying jobs to afford a home without financial assistance from parents or family. While the proposed measures in this statement are a positive step forward, there remains an urgent need to address the lack of housing supply for first-time buyers and middle-income earners. 

With the rising cost of living coupled with continued interest rate increases in 2023, many Canadians are feeling the pressure of financial stress when it comes to their ability to purchase a home and/or manage mortgage payments. While it is encouraging to see that the government is working to address the ongoing challenges buyers, sellers and homeowners are facing in the current economic climate, further measures are required to increase housing supply in the short- and medium-term.

Steps in the right direction, despite need to curb inflation

Incentivizing developers to build more homes at a faster rate — specifically purpose-built rental stock — is a promising step in the right direction. In addition to its plans to encourage developers to build thousands more rental units, the federal government announced new limitations on tax deductions for landlords of short-term rental properties, as well as funding to help municipalities crack down on offenders in regions where the practice is prohibited. While these measures are intended to open up more inventory for longer-term rental contracts and increase the number of properties for sale, they are unlikely to have a material impact on supply, especially in major cities where inventory is most needed. 

The Liberal government drew criticism from opposition parties and the central bank for announcing additional spending at a time when the country should be focused on reducing inflation. While bringing inflation under control is important, it’s also critical to prioritize access to affordable housing for all Canadians. With aggressive immigration targets and increasing household formation, it is essential to focus efforts on the creation of more homes. Supply remains decidedly out of step with demand, even if many would-be buyers remain temporarily sidelined. Home prices are poised to appreciate further when interest rates inevitably begin to come down.

Overall, we are pleased to see a strong commitment from the government to address the supply side of the ongoing housing affordability crisis. Although there are concerns about additional spending causing further inflationary pressures, the emphasis on creating affordable rental housing and incentivizing developers is crucial. It is my hope that the Canadian government continues to tackle the severe supply shortage, and prioritizes addressing the lack of affordable homes for middle-income Canadians.