Governments alone cannot fix Canada’s housing affordability challenges

Rent subsidies and more social housing are helpful but not the cure-all solutions

Aled ab Iorwerth
Deputy Chief Economist

As Deputy Chief Economist, Aled ab Iorwerth is part of a team of housing economists and researchers striving to improve Canada’s understanding of drivers and barriers in housing markets and how they impact affordability. Aled is also part of a diverse national team of researchers and analysts who are investigating impediments to housing supply and potential solutions.

CMHC’s aspiration and objectives

CMHC’s central aspiration is that everyone in Canada has a home that they can afford and that meets their needs.

Unfortunately, we face immense affordability challenges in many parts of Canada and housing cost burdens for Canadians across the income spectrum. Clearly, Canadians with low incomes are suffering acutely from high housing costs, but lack of affordability is a problem imperiling the prosperity of all Canadians.

While lack of affordability is common, solutions must vary. While financial support and the construction of more social and affordable housing will help those with lower incomes, there must also be increased supply of housing aimed at the market. The interconnectedness of housing means that both tracks must be pursued.

So, to overcome these affordability challenges, we need a range of government policies and investments stemming from several sources, notably the private and public sectors. The scale of the challenge is so large that the private sector must be involved – governments cannot do this on their own.

Canada’s affordability challenges

Affordability can be measured in several ways. The graph below simply charts the path of house prices across a range of developed countries over the last decade. Canada has seen the greatest price growth in this group. While real incomes have risen strongly as well in Canada, their path has not matched house prices’.

Rising house prices are just one of the challenges faced by many Canadians. Housing is a necessity and Canada recognizes that access to shelter is a human right, so there is a critical need to ensure housing for the most vulnerable. As the proportion of income spent on housing is higher for those with low incomes, affordability challenges are also most intense for low-income households.

But middle-income households face housing affordability challenges as well. When renters search for better places to rent, they face a sharp rise in rents if they can even find a place.  Obtaining reasonable rental properties is also an acute problem for the young when they first leave the family home.

Then, many renters seeking to purchase homes for the first time and homeowners aspiring to better housing, will confront high costs. In the absence of adequate supply, households stretch their budget to go deep into debt to get the housing they want. In many parts of Canada, middle-income households are challenged by the lack of affordable market housing, whether for rent or ownership.

Lack of affordability for homeownership means households risk getting excessively into debt together that couples with a broader risk to the economy of concentrating savings and expenditure on housing. Canada now faces this challenge: Canadians’ household debt levels are very high by international and historical standards and have increased markedly over the last 20 years.

Getting housing costs down across the board is critical. Low-income households face hardship because of housing costs, which needs a targeted solution, but risks from high house prices and excessive debts harm everyone and should also be considered.

Policy approaches will differ across the housing system

Although there is a common objective of lowering housing costs across the board, policy approaches must differ when addressing households of different income levels.

It is an immutable fact that there is a cost to being housed and it is high relative to many households’ incomes. Given these costs, the low incomes of these households mean they will simply not be able to afford any housing at a market rate. Clearly, these households need government support of some form, whether as a direct income transfer or having their rents lowered by subsidy. Governments help through a range of housing allowances and rent supplements, including the Canada Housing Benefit.

There are concerns with such subsidies, however. They can encourage landlords to charge higher rents and so the benefit of the subsidy goes to them rather than the intended recipient. This is particularly a concern if supply of housing is limited. Those receiving subsidies cannot shop across landlords to promote competition among them and keep rents competitive.

Governments must therefore ensure that enough housing supply is available. More social and affordable housing structures will help low-income households directly. CMHC has implemented the National Housing Co-Investment Fund to help in this regard. But building more social and affordable housing is not a panacea either. International evidence suggests that households in such structures are less likely to move to obtain better jobs. These trade-offs explain why CMHC aimed at a comprehensive response to address the challenges of low-income households through the National Housing Strategy.

As mentioned, households with more income also face high rents or costs of homeownership in Canada today. Direct subsidies are not suitable in these cases because the market could supply enough housing at a reasonable cost, so there is no clear imperative for the government to intervene in the same way. But the challenge we face in Canada is similar: not enough housing is being built whether it’s for rental or homeownership. CMHC estimated that an additional 3.5 million housing units are required to achieve affordability by 2030.

To address this imperative, we need more private-sector investment to build more supply in the housing market, particularly in the rental sector. To help increase supply, CMHC introduced the Rental Construction Finance Initiative, which aims at building more rental apartments in markets that desperately need it. Markets like Toronto, Vancouver, Montreal, Victoria and Halifax, to name a few. Much more needs to be done. Given income and population growth, further action is required by all levels of government to facilitate increased housing supply by the private sector.

So, even though there are common affordability problems across the board, policy solutions will differ. The market will never supply units at a low-enough cost for households with very low incomes. Governments must help.

In contrast, the market can supply housing in large numbers to the market if they have access to skills and financing, but governments have a role to ensure that the regulatory framework is supportive, so market demand is met. Governments must take a system-wide view and not encourage housing supply for low-income households by discouraging housing supply for middle-income households.

The imperative of increasing housing supply will be even greater as Canada seeks to attract more immigrants. As immigrants increasingly bring wealth, many become homeowners immediately upon arrival in Canada, rather than starting as renters. Accommodating more immigrants, therefore, means more housing must be built across the entire spectrum.

The challenge of housing affordability needs to be tackled across the board

The burden on low-income households is clearly high, but the risks coming from a lack of housing supply for those with higher incomes are great as well. The financial fallout from not addressing challenges in the housing market can be great, as we saw in many countries around the world in 2008-09. We need a holistic approach to the housing system.

Addressing only one part of the housing continuum risks wasting resources. Because households can move from one type of housing to another, a solution for one part is likely pushing on one part of a balloon: Some other part of the balloon will pop out and potentially burst the whole balloon.

A lack of supply of housing for homeownership means more households will stay in rental, which means other households cannot move out of social and affordable housing. The housing system is interconnected, so fixing Canada’s affordability challenge requires a suite of policies to affect the entire system.