IMF Solution to Housing Affordability
Policymakers around the world are struggling to deliver affordable housing. Housing affordability represents the cost of a basic human need—shelter. Canada is no exception as it grapples to provide affordable housing in cities like Vancouver and Toronto, where rents are high, and for many, the dream of owning a home has faded.
Short-term housing affordability fixes make it worse
The IMF report finds that when policymakers resort to short-term fixes to the problem the result if worse affordability. These short-term solutions include:
Relaxing mortgage rules to enable households to borrow more (higher loan-to-income and loan-to-value ratios)
Lowering mortgage rates
Increasing tax-deductibility of mortgage interest-rate costs
Subsidizing home purchases directly
Creating programs that allow tax-free withdrawals from retirement savings
According to IMF research, well-meaning policies that aim to improve housing affordability by increasing households’ capacity to borrow usually unintentionally raise house prices—ultimately resulting in less affordability and forcing homebuyers to borrow more and take on additional higher household debt
Why do these housing affordability policies backfire?
Housing supply is fixed in the short-term, so any increase in households’ ability to borrow will increase homebuying budgets and demand for housing. Since there is no additional supply to meet the demand, the competing buyers for limited supply lead to increased house prices that ultimately make houses less affordable than they otherwise would have been.
This is the conclusion from IMF research that compared the dynamics of house prices in eleven Canadian Census Metropolitan Areas with households’ ability to borrow—the so-called “attainable” house price.
Our platform matches you with local, pre-screened, values-aligned Realtors and Mortgage Brokers
Shared values lead to better working relationships.
Low interest rates fuel house prices
IMF research shows that median house prices in most Canadian cities have tended to increase in line with households’ borrowing capacity, and in some markets, prices can exceed borrowing capacity.
Due to stagnant Canadian incomes, homebuyers have been able to borrow more money over time primarily due to a significant decline in mortgage interest rates over the past two decades. As a result, increases in borrowing capacity have been quickly reflected in higher house prices.
This has happened in Toronto and Vancouver, where house prices have increased much more than implied by economically attainable prices, resulting in over-valuation for an extended period.
Overall, this has contributed to a rise in the reliance of homebuyers on larger mortgages, funds from family, larger down payments, and private lenders who do not follow federal mortgage regulations.
Mortgage rates have little room to drop further and incomes are growing slowly so homebuyers in Canada will not be able to support larger mortgages in the future to buy a house. This will likely weigh on housing demand and bring about a decline in house prices that will improve housing affordability. There is a risk, however, that the decline in house prices could take the form of a sharp and disruptive price drop.
Below are the IMF estimates of what Toronto and Vancouver house prices should be based on economic fundamentals.
Supply is the only solution
To sustainably address housing affordability, regional and federal authorities in Canada need to work together to develop and implement a comprehensive housing supply strategy.
To reach the objective on increased supply government should:
Accelerate the availability of residential land for re-development / densification;
Shorten the approval process for building permits and re-zoning;
Improve transparency and certainty in the approval process;
Ensure development plans are time-limited to avoid pre-sale and construction delays;
Re-evaluate rent control policies to improve the supply of rental properties and give households more dwelling choices; and
Assess incentives for developers to build more purpose-built rentals with a view to encouraging a more balanced mix of rental supply (60% owner-occupied / 40% purpose-built rental).
The recent establishment of the Expert Panel on the Future of Housing Supply and Affordability and the expanded Rental Construction Financing Initiative to increase the supply of rental units for middle-income households are certainly steps in the right direction.
Most of the responsibility lies with local municipalities who need the courage to allow a minimum of 6 to 8 storey apartment across major Canadian cities (like Paris did between 1840 and 1860).
In April 2019, Mortgage Sandbox compared how Metro Vancouver housing supply has fallen behind its population growth and found that by 2021, Metro Vancouver may be short 62,000 homes, or enough to house 150,000 people.
The in depth analysis was published in the article, “Two Decades of Vancouver Housing Crisis”.
