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Will anyone ever be able to afford a home?
Housing mania is gripping the United States and Canada – with millions wanting but unable to find an affordable place to live.
For years, both countries have faced a growing housing crisis. The pandemic exacerbated the struggle, and only now are governments starting to take the problem seriously. Still, securing affordable housing remains a daily struggle for would-be buyers, renters, and a growing number who are either homeless or under-housed.
In February, the median home price in the US actually fell to $400,500, a decline of 7.6% annually, but housing remains unaffordable for the majority of the country. In December, a mere 15.5% of homes were considered affordable (mortgage payment no more than 30% of monthly income). A recent poll found that around half of aspiring buyers said they can’t afford a down payment and closing costs, though a mere 13% of would-be buyers said there was “nothing” keeping them from buying. This suggests that even those who might be able to afford a down payment face other challenges in the market. High mortgage rates, around 7%, “historically” low stock, and a lack of targeted rental and non-market units are keeping homes out of reach for Americans.
With homebuilders waiting on lower interest rates to initiate new builds, pressure on the market may grow in the short term. Housing starts were down in March, nearly 15% below February and 4.3% lower than a year ago.
In Canada, it’s even worse. Last month, the benchmark price was a whopping CA$720,000, up 2% over February with mortgage rates hovering between 5 and 6%. Homeownership now costs nearly 63% of the median household income, up from 35% in 2002.
High housing costs are also driving up inflation – as in the US – and the country also faces a supply shortage. In 2022, the Canada Mortgage and Housing Corporation said the country would need 5.8 million new homes by 2030 to reach affordability. Yet, new builds fell in March, down 7% from February, and the six-month trend is also down, which means the country isn’t building nearly enough housing. There is one exception: British Columbia, with starts up 27% in Vancouver, as the province pushes new builds through a series of measures, including zoning reform to push beyond a focus on building single-family dwellings and pro-density minimum building requirements.
Why are houses so expensive?
Prices are high thanks to high demand and low stock, as usual, but there’s more to it. There’s also a lack of political action to build or encourage the building of housing people need where they need it – for instance, non-market units, purpose-built rentals, multiplex units – which is keeping stock low for segments of the population, including younger buyers and lower-income earners.
Ottawa ceased its involvement in building social housing in the 1980s and 1990s, which hasn’t helped. The US has long been a laggard on social housing, though in recent years some municipalities are starting to build publicly owned units.
Exclusionary zoning – or “not in my backyard” NIMBY-ism – has been another hurdle in both countries, with cities fighting the density necessary to build at scale and homeowners keen to protect their home values by keeping new housing out. A jump in the number of newcomers in Canada, about 471,000 last year, also contributes to market pressure.
Labor shortages are also hampering new builds in both Canada and the US, with the latter still slowed by the legacy of the Great Recession, which did more damage stateside than up north.
And then there’s the elephant in the room: the financialization of housing through which big institutional investors dominate the market looking for returns on their capital. This pernicious problem stems from seeing houses as assets first and foremost, a source of maximized profit, which invites speculation and market dominance by institutional investors who seek to inflate prices. Smaller investors, meanwhile, simply buy and flip properties.
Thinking of housing as an asset also means that individuals may see their homes as investments for retirement. Housing policy expert Carolyn Whtizman says “since the 1970s, the federal government has been treating housing, particularly ownership housing but more recently multifamily apartments, as the primary investment vehicle for retirement.”
“Housing in the US has always been an asset for the middle class,” says Noah Daponte-Smith, an analyst at Eurasia Group. “Your house is your primary retirement savings vehicle.”
Housing investors and those who rely on their homes for retirement planning want, even need,higher prices, which leaves millions priced out of the market or stretched to the brink.
In Canada, the share of investors and repeat buyers in the market has risen precipitously compared to first-time buyers, with investors accounting for 30% of purchases last fall. In the US, first-time buyers make up a similar share of the market at 32%, and recent data suggests institutional investors could make up as much as 40% of the single-family detached home rental market in the next five years or so, which means higher prices for renters and buyers alike.
What’s going to make housing affordable?
Solving the housing crisis will take years of commitment to a number of measures. Whitzman says Canada needs a period of stable house prices and rising incomes to produce an affordable market, but it also needs government involvement in building or incentivizing stock that matches the needs of buyers and renters at various price points. The same is true in the US.
The other side of the equation is income – namely, people need higher salaries. Half of Canadians now live paycheck-to-paycheck, and a whopping 78% percent of Americans are in the same boat, which leaves no room for saving for a down payment.
Stabilizing requires efforts and cooperation by governments at the national, state/province, and local levels. One approach could be ending the capital gains exemption on the sale of a principal residence to dampen demand, just as, according to Paul Kershaw of Generation Squeeze, taxing home wealth and using the cash to build affordable housing would have a similar effect while increasing stock.
What’s being done now?
In recent years, and especially in the last few months, the Trudeau government has awoken to the need to go all-in on housing. Its 2023 Housing Accelerator Fund helps municipalities build homes, trading federal cash for national building goals, including upzoning, transit accessibility, and affordability. The fund is expected to generate 750,000 new builds in the next 10 years, and so far the feds have greenlit 179 local applications.
In Canada’s federal budget, tabled on Tuesday, the government committed to several measures focused on housing affordability to build what it says will be 4 million homes by 2031. Those include longer mortgage amortization periods, $15 billion for construction loan programs, $6 billion in infrastructure funding, and buyer tax breaks. It also promised to “restrict the purchase and acquisition of existing single-family homes by very large, corporate investors,” but those details are to be determined in the fall after consultations, and the promise itself is full of asterisks, such as “existing” and “very large.”
Stateside, Daponte-Smith points out that while there is a housing crisis, “especially in major metro areas,” no national housing strategy exists. Instead, housing policies are “determined at the state and really even at the local level,” which means that every builder has to deal with a different set of local laws and zoning codes that control what they can build and how expensive it will be.
The Biden administration is increasingly aware that it needs a housing strategy. In March, the White House announced the latest in its housing affordability plan, which includes pressuring Congress “to pass a mortgage relief credit” worth $5,000 a year over two years along with $25,000 as a cash grant for down payment assistance for first-time buyers. On the supply side, the administration is also calling on Congress to boost new builds with builder tax credits and announced grants for new builds of affordable units for buyers and renters.
Electoral consequences?
Both governments are under pressure to deliver affordable housing but are hampered by long timelines, limits on labor and capital, the need to cooperate and coordinate across levels of government, and views that housing is an asset rather than a human need.
Voters expect the Biden administration, Trudeau government, and their state/provincial and local governments to deliver, and they’re increasingly impatient – meaning they may punish those that don’t at the ballot box.
With both Joe Biden and Justin Trudeau facing voters in November and by the fall of 2025 respectively, you can expect both men to continue working on housing affordability – to get first-time buyers into the market and rents down for those unable or uninterested in buying. But they’ll be battling an intransigent market that serves investors and incumbents, and the fact that even in the best-case scenario there will be a lead time between better housing policy and good outcomes at scale.
Broken housing markets could shape US and Canadian elections
The United States and Canada share hundreds of billions in annual trade, a deep defense relationship, the world’s longest undefended land border, and an affordability crisis that threatens to upend political fortunes. At the heart of that problem is housing. As both countries grapple with inflation and rising interest rates, the cost of shelter and the risk of foreclosures are rising.
The causes of unaffordable housing include a complex mix of under-supply (itself caused by several things), urbanization, marketization and speculation, immigration, population growth, temporary foreign workers, international students, and natural barriers. But whatever the cause, the US and Canada are both millions short on needed housing stock.
For President Joe Biden and Prime Minister Justin Trudeau, unaffordable shelter presents both a policy challenge and a political liability, especially as each faces looming elections. Biden is up for reelection in late-2024, and Trudeau must face voters by the fall of 2025.
Rising interest rates – and foreclosures
On Tuesday, Canada’s consumer price index revealed an inflation jump, moving from a two-year-plus low of 2.8% in June to 3.3% in July. The uptick makes a Bank of Canada rate hike in September more likely. The bank raised rates 25 basis points last month, sending the target rate to 5%. This summer, mortgage costs have been the primary cause of inflation – a vicious cycle of rate hikes driving mortgage costs, which drive rate hikes.
In late July, the Federal Reserve raised US interest rates to 5.25% – the highest in 22 years. That same month, the inflation rate moved 0.2% to hit 3.2%, driven, like Canada, by high housing costs.
As rates rise, so do US foreclosures. According to property data firm ATTOM, foreclosure starts rose 15% in the first half of 2023 – and a whopping 185% over the rate two years ago. Over 185,000 properties faced foreclosures in the first half of 2023 as the numbers trend back toward pre-pandemic rates. In 2017, more than 428,000 homes were foreclosed, while in 2018 it was more than 362,000, and 2019 saw over 296,500. The number of foreclosures had been in decline after the 2010 high of 1.65 million in the aftermath of the 2008 financial crisis. But last year was the first year that saw a rise in foreclosures since those dark days. Pandemic measures protected homeowners in recent years, but those are now in abatement.
Anecdotal data in Canada suggests an upward trend in foreclosures there too. A Calgary lawyer, for example, says the numbers are surging in Alberta’s largest city – the worst he’s seen since 2008. According to the Canadian Bankers Association, 0.15% of mortgages, just over 7,600, were in arrears in June 2023. That rate is low, but underlying conditions suggest trouble ahead, with the government offering new lending guidelines to support distressed borrowers in a bid to keep them in their homes. As the Globe and Mail reported in July, significant numbers of mortgage holders are falling behind on bills and borrowing to cover daily expenses. Meanwhile, household debt in Canada is the highest in the G7.
Moreover, many Canadians have variable-rate mortgages, where the interest rate paid is tied to a fluctuating prime rate. As interest rates have risen, more homeowners have shifted to fixed-rate mortgages. As the Financial Post reported in June, variable-rate mortgage share fell last April to under 8% – down from a January 2022 recent high of 56%.
Mike Moffat, founding director of the PLACE Centre at the Smart Prosperity Institute, says the foreclosure rates aren’t showing up at scale in data yet – but pressure is mounting. “Most of the cases that are starting to face pressures are the variable-rate mortgages,” he says. Lenders are using “creative solutions” such as extreme long-term amortization periods to manage cases, he notes. But there may be greater trouble on the horizon.
“Where we might start to see cracks forming is on fixed-rate mortgages,” he says, “particularly anybody who took a three-, four-, or five-year mortgage back in late-2020 or early 2021 ... When more of those fixed-rate ones start to come up for renewal, that’s when you’re going to see those pressures.” Folks who had locked in cheap rates will face much higher borrowing costs – and tough choices.
Broken markets home to sky-high housing prices
Unaffordable housing for owners and renters alike is a problem in both countries, but the problem is more pronounced in Canada. As Moffat notes, “Both Canada and the United States have some markets that are essentially just broken. You have maybe a half dozen big cities in the US where the housing market is out of control, and it’s the same thing in Canada where a half dozen housing markets are completely out of control, but the difference is in Canada, that half-dozen is 75% of the country.”
In April, the average price of a home in Canada rose to CA$716,000, up $100,000 in four months. While that’s the national average, some local markets are much worse. In Toronto, the average is over $1.1 million. In Vancouver, it’s over $1.2 million. This is also bad news for renters. According to Rentals.ca, in August, the average rental price for a one-bedroom apartment was $1,860 a month, up nearly 11% year-over-year. The average is $3,013 in Vancouver and $2,592 in Toronto.
Prices in the US are better overall, but some parts of the country are, as Moffat says, “broken.” According to Zillow, the average home cost in America is now over $348,000. But in the top markets, prices are much higher. New York averages over $618,500, while Seattle is above $701,000. Los Angeles is nearly $890,000, San Diego is almost $882,000, and San Francisco comes in at a whopping $1.12 million (that’s after a 4.98% year-over-year price decline).
Governments are waking up to the problem
The federal government in Canada is now ramping up its housing rhetoric – and perhaps its action. Newly appointed Housing Minister Sean Fraser says the feds should have never left the affordable housing game (which it has done over the last five decades). He is advocating more building, and there’s now talk of the governing Liberals leveraging their power and money to induce cities to build more supply. Fraser also says the government plans to make housing affordablewithout tanking the value of homes for existing owners. The government also recently launched a tax-free First Home Savings Account designed to help first-time buyers save for a downpayment.
Fraser’s comments come as Conservative opposition leader Pierre Poilievre is making affordability, including housing, a core part of his campaign message, and promising that, if elected, his government would withhold federal money from municipalities that don’t meet housing goals. It also comes in the wake of a Trudeau gaffe: The PM recently said housing isn’t primarily a federal responsibility, which is both true and the last thing Canadians want to hear.
The Biden administration has also caught on to the importance of affordable housing and is aiming to boost supply and bring ownership within reach for more Americans. The new strategy, announced in July, includes measures to ease land use and zoning restrictions, expand financing, and convert commercial spaces into residential spaces.
Housing could shape elections
With the Liberal government lagging in the polls, it seems to have caught on that it needs to go all-in on housing ahead of the next election. For months, Canadians have felt the federal government wasn’t paying enough attention to housing.
While events matter and can shift what the next election will be about, Moffat points out that housing is poised to be a major issue. “Barring any large crisis in the next 18 to 24 months, I do believe housing is going to be a top issue, either on its own or in a larger basket of affordability issues.”
In the US, housing policy proposals may end up in broader packages. Clayton Allen, US director at the Eurasia Group, says “presidential candidates are focused more on the question of how to address cost increases and inflation in general, and housing costs would fall under that broad umbrella.” So while there aren’t many specifically targeting housing, there’s a “laundry list of ideas to increase wages, improve the US economy, and tamp down inflation.” And since housing is bound up with affordability, it’s likely to be on the campaign agenda one way or another.
Will things get better?
Foreclosures could drive down housing prices. A recession – which would also induce foreclosures – could do the same. But nobody with an ounce of empathy wants that, and political incumbents certainly don’t. Doubts remain about the future of inflation, interest rates, government willingness to adopt effective housing policy, and the market’s response to government action. On top of that, both the US and Canada face major housing deficits that will take years to remedy.
There is some hope that things will improve as people demand housing action and punish politicians who fail to deliver. But relief, if it is to come, may be years away – perhaps too late to save today’s leaders, who will soon meet angry and anxious voters.