Better supply should take priority over stronger purchasing power

by Ephraim Vecina on 09 Oct 2019

In its attempts to solve the housing affordability crisis, the Canadian government has preferred to take steps in improving consumer access to currently available housing.

Indeed, most of the steps pledged by this election’s candidates are focused on adjusting mortgage terms and further penalizing wealthy foreign buyers – pledges that a significant proportion of would-be buyers have lauded.

However, a new analysis by the International Monetary Fund has argued that affordability can be truly achieved only through the construction of a much greater number of homes.

“Even well-meaning policies that aim to improve housing affordability by increasing households’ capacity to borrow may unintentionally raise house prices—ultimately resulting in homebuyers having to borrow more and leading to higher household debt,” the IMF stated.

In particular, governments at all levels should work towards speeding up the delivery of development-ready land, and streamlining the permits/re-zoning approval process.

Canadian authorities should also ensure that construction projects are not delayed, and provide incentives for the development of more purpose-built rentals

Most importantly, Ottawa should consider “re-evaluating rent control policies to improve the supply of rental properties and give households more dwelling choices.”

These steps are potentially more effective in the long run, because stronger purchasing power does nothing to address the fact that there are not enough homes to begin with.

“So, any increase in households’ ability to borrow will increase demand for housing, increase house prices, and ultimately make houses less affordable than they otherwise would have been.”

Said phenomenon has become especially apparent in Toronto and Vancouver.

“Homebuyers have been able to borrow more money over time due to rising incomes and a significant decline of mortgage interest rates over the past two decades.  As a result, increases in borrowing capacity have been quickly reflected in higher house prices,” the IMF explained. “Overall, this 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.”

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