Low Inventory and Low Interest Rates Both Key Factors in Ontario’s Housing Affordability Crisis

With rising residential prices far outpacing incomes and not enough homes on the market for everyone who wants to buy one, the supply issue is the root of Ontario’s­ housing affordability crisis. In addition to the supply shortage, nearly 2 years of record low interest rates helped Canadian home prices grow at their fastest pace on record. But will forthcoming rate hikes and a plan to build 1.5 million homes in 10 years slow the overheated housing market? We don’t think so.

Low Inventory

Low inventory of homes for sale proved a major driver of prices in 2021. In a new report, online realtor Zoocasa said the Canadian Real Estate Association cites only four times in history when the national total months of inventory on the market dropped below two months, and they were all in 2021. However, low housing supply is not a quick fix.

The GTA remains the primary destination for new immigrants and is at the centre of the Canadian economy. For far too long, governments have focused on short-term band-aid policies to artificially suppress demand. Current market activity highlights decisively that these policies do not work, and unless governments work together to cut red tape, streamline the approval processes, and incentivize mid-density housing, ongoing housing affordability challenges will escalate.

In December 2021, Ontario appointed nine members to a new Housing Affordability Task Force that will provide the government with recommendations on additional measures to address market housing supply and affordability. The Ontario Housing Affordability Task Force released its report last week, outlining recommendations on how to do just that.

The Task Force has spent the last two months consulting municipal leaders, planners, unions, developers and builders, the financial sector, academics, think tanks, and housing advocates, on ways to:

• Increase housing density across the province
• End exclusionary municipal rules that block or delay new housing
• Depoliticize the housing approvals process
• Prevent abuse of the housing appeals system
• Provide financial support to municipalities that build more housing

The end goal: “We propose an ambitious but achievable target: 1.5 million new homes built in the next 10 years.” The 55 recommendations are outlined as follows, directly from the report.

How to Increase Ontario Housing Supply and Improve Affordability:

• Recommendations 1 and 2 urge Ontario to set a bold goal of adding 1.5 million homes over the next 10 years and update planning guidance to make this a priority.
• Recommendations 3 – 11 address how Ontario can quickly create more housing supply by allowing more housing in more locations “as of right” (without the need for municipal approval) and make better use of transportation investments.
• Recommendation 12 would set uniform provincial standards for urban design, including building shadows and setbacks, do away with rules that prioritize the preservation of neighbourhood physical character over new housing, no longer require municipal approval of design matters like a building’s colour, texture, type of material or window details, and remove or reduce parking requirements in cities over 50,000 in population.
• Recommendations 13 through 25 would require municipalities to limit consultations to the legislated maximum, ensure people can take part digitally, mandate the delegation of technical decisions, prevent abuse of the heritage process and see property owners compensated for financial loss resulting from designation, restore the right of developers to appeal Official Plans and Municipal Comprehensive Reviews, legislate timelines for approvals and enact several other common-sense changes that would allow housing to be built more quickly and affordably.
• Recommendations 26 through 31 seek to weed out or prevent appeals aimed purely at delaying projects, allow adjudicators to award costs to proponents in more cases, including instances where a municipality has refused an approval to avoid missing a legislated deadline, reduce the time to issue decisions, increase funding, and encourage the Tribunal to prioritize cases that would increase housing supply quickly as it tackles the backlog.
• Other recommendations in the report deal with issues that are important but may take more time to resolve or may not directly increase supply (recommendation numbers are indicated in brackets): improving tax and municipal financing (32-37, 39, 42-44); encouraging new pathways to homeownership (38, 40, 41); and addressing labour shortages in the construction industry (45-47).

The Toronto Regional Real Estate Board (TRREB) welcomes the recommendations from the Provincial Government’s Housing Affordability Task Force.  Governments at all levels must take coordinated action to increase supply in the immediate term to begin addressing the supply challenges of today, and to work towards satisfying growing demand in the future.

Low Interest Rates

Interest rate hikes, signaled by the Bank of Canada to come in mid-2022, are on the minds of home buyers and homeowners alike. But how bad will it be?

To find out Zoocasa looked back to the last time Bank of Canada rates rose in 2018. That year there were three hikes and real estate activity did slow, with prices falling 4.9% year over year and sales down 19%.

But housing experts say the decline was mostly brought on that year by the introduction of the stress test, which cut affordability for the average home buyers by 20%, said Zoocasa.

“Although the last time interest rates rose we saw sales activity cool down, it’s important to remember that this change went hand in hand with the implementation of the mortgage stress test, which dramatically impacted the amount that prospective buyers could qualify for,” said Zoocasa CEO Lauren Haw. “And, because Canadians have been stress tested to qualify for their mortgages at rates upwards of 5%, we have been prepared as best as possible to weather an increase in rates.”

Under current stress test rules, fixed mortgage rates would have to rise to 3.25% for the amount buyers are qualifying for to change, she said. 

The scheduled dates for the interest rate announcements for 2022 are as follows:

• Wednesday, March 2
• Wednesday, April 13
• Wednesday, June 1
• Wednesday, July 13
• Wednesday, September 7
• Wednesday, October 26
• Wednesday, December 7

What can we anticipate and how do we navigate this? 

Variable rate clients, bank prime right now with most lenders today is sitting at 2.45%. If you happen to put your variable rate mortgage in place over the last couple of years, you’re most likely sitting at prime minus 1. Therefore, you’re at 1.45%. 

The Bank of Canada tends to move at quarter-point increases. To that end, based on their rate announcement schedule above, with 7 announcements left for 2022, that puts us at a maximum of 2.95%. 

With the supply improvements a work in progress and a long time coming and interest rates making little or no difference in the next year, we can expect that sales prices will continue to climb and this crisis is far from over. 

How Storey Collective Can Help

We examine GTA home sales each month to advise buyers and sellers on how best to secure and sell properties in the Greater Toronto Area. 

If you’d like advice on how to make the most of the housing market during a particular season, get in touch with Storey Collective for a free phone consultation.