Steve Pomeroy
Executive Advisor CHEC
pomeros@mcmaster.ca
Perhaps the most frequently used phrase of 2024, across politicians, the media, pundits and consumers was “the housing affordability crisis” The critical question for 2025 is will a crisis persist, or could the housing situations improve? I posit that things may get marginally better, although not so much for those with low income and those currently living in encampments, unless governments make ending encampments the primary policy focus, and invest accordingly.
Like the term “affordability’, the phrase “housing affordability crisis” is ambiguous and depending on who is speaking has a variety of meanings and degrees of a crisis:
- To pent-up potential homebuyers it captures the frustration that they may never be able to afford to own;
- Renters, especially those that have to move for a variety of reasons, including evictions and life changes, face dramatically higher rents compared to their previous costs;
- And with an absolute shortage and ongoing erosion of lower rent housing options, lower income renters that cannot find something they can afford either live precariously, at risk of homelessness, or are already in encampments and just trying to survive.
In considering what 2025 and beyond may bring for each of these groups, it is useful to separately examine trends and impacts across these related parts of the housing system. Any prognostications are of course subject to an unprecedented degree of uncertainty created by concurrent political change in both the US and Canada and how these may impact economic conditions that underpin housing markets.
First considering the prospects for ownership, which is a concern from many young families. Home prices became elevated during the Covid period as a result of limited listings (a form of “supply” separate from new construction), substantial cuts to near zero mortgage interest rates, which massively enhanced capacity to lever financing, retained savings, and efforts to acquire more space to accommodate working from home. The upward price spiral then attracted investors, especially individuals levering their accumulating home equity such that expansion of small-scale investors distorted demand. This was especially prevalent in larger higher cost cities where the opportunity to prepurchase condominiums was readily available and this investor demand then encouraged more starts. Since 2020 Toronto (38%) and Vancouver (22%) alone have accounted for 60% of all condominium starts nationally. By comparison they house 24% of the national population.
This investment model has subsequently unraveled, with prices of condo units declining 10-20 per cent from their peak in 2022. An unprecedented increase in purpose built rental completions alongside too many investor condos adding rentals created panic selling of investor condos, especially for those that borrowed on a variable rate and found their mortgage costs unsustainable. And more so when weaker demand from subsequently reformed temporary immigration policy made it hard to find or retain tenants.
This issue and price correction is far more prevalent in larger high-cost cities, because that’s where the majority of condominiums are constructed. But it permeates across the country because Canada’s three largest cities account for more than two thirds of all new condominium starts (and mainly Toronto and Vancouver). So when the investor market in Toronto (GTA) and Vancouver turns sour it heavily influences overall national statistics, both in terms of volume and price effects.
Since peaking in summer 2022 home prices across much of the country have fallen back and stabilized at around 15%-20% below the peak in spring 2022 (with exception of Alberta where renewed interprovincial migration since 2020 has added new pressure and brought prices to a new peak in late 2024, although prices remain 30% below the national average composite price).
Given current political-economic conditions it is expected that mortgage rates have little room to improve further (and could go back up). US tariffs, if imposed, are anticipated to deliver an economic shock with substantial job loss and weak income growth. Coupled with current pressures and panic amongst some investor purchasers this suggests a continued correction and softening in home prices across most markets. Along with more favourable mortgage policies (amortization increased to 30 years and insured loan threshold raised from $1 million to $1.5 million), this may facilitate some young families, especially those with family financial assistance, to enter the ownership market. But this will be at an insufficient volume to add any inflationary pressure on home prices (again excepting Alberta, where lower prices and political encouragement are fueling increased demand).
So overall a softening in the home purchase market.
The rental sector is also likely to stabilize, with reduced pressure on rents. While some rent increases may persist, these are more likely to be closer to the rate of inflation than the double digit increases of recent years. The small improvement in access to ownership noted above, will remove some renters and free up units.
While recorded as condo starts, a substantial number of condos (more than 30% and over 50% in the GTA since 2016) are purchased by investors and consequently act to augment rental supply (especially in Vancouver and Toronto).
Meanwhile a historically high number of rental starts is now transitioning to completions and large additions to rental supply across many cities, reflected in the national weighted average rental vacancy rate increasing from 1.5% to 2.3%.
Since 2016, purpose-built rental starts have increased fourfold, from less than 10% of all starts for the previous two decades to over one third of all starts (and much higher in many communities outside of Ontario).
Note that in the higher cost cities rental construction is crowded out by a large condo sector, so these cities contribute much less to the overall national total of purpose-built rental starts. Toronto and Vancouver together contributed only 9% and 13% respectively to rental starts since 2020.
While adding to overall supply, this increase is not addressing the need for affordable supply. These new units are entering the market at higher rents, typically over 150% of the CMHC average market rent. However, the excess supply at these higher rent levels is placing a cap on increases for higher rent properties, and indirectly helps to moderate the overall rate if rent increase.
Meanwhile many previously lower rent units have already cycled through to a new tenancy with associated large rent increase, so there is less room to increase again in a subsequent vacancy. This results in a slowing rate of increase, as already revealed in the recent yr-yr rent changes in rentals.ca data.
Another key factor in the rental sector is the implementation of quotas on international students and temporary foreign workers (TFW) – two groups which by their nature are almost always renters.
The very high levels of unmanaged TFW and student permits caused a spike in rental demand and was a significant factor driving up rents in 2021-23. This source of demand has now been reduced and is being more carefully managed. And if expiring visas and permits result in emigration of these individuals this may add to rental vacancies and help reduce pressure on rents.
The additional rental supply (via both purpose built and condo investor rentals) together with reduced temporary immigrant demand may not result in absolute reduction in rents, although rentals.ca data suggest some cities are reporting turnover rents slightly lower than a year ago. But this reduced demand will certainly help to slow the very large rent increases of recent years. And as the heightened level of new rental construction continues to come onto the market, this should create a more stable and self-correcting rental market.
So, similar to the ownership sector, conditions are likely to soften in the rental sector, although this may then reduce incentives and the attraction to build rentals.
Finally, in the third component of the system, the prospects for low income and homeless persons and families is less likely to improve. The softening rental market conditions will not be sufficient to see rents fall to affordable levels, but increasing vacancies will create some opportunities to relocate people from encampments, if some form of rental assistance can be provided (this will likely require monthly subsidy in the order of $500-$750, depending on local rents and availability). While not an insignificant cost, given the high numbers of homeless and people in encampments, this would be a sound investment when compared to the costs incurred in the emergency system, (policing, hospitals, and community services, and the monthly cost to rent inappropriate hotel and motel rooms as emergency shelters).
For the chronically homeless, which typically involves both mental health and addiction challenges, a more targeted investment in permanent supportive housing with on-site wrap around supports is critical to stabilizing and managing health and addiction challenges. Again, not inexpensive but critical targeted investment compared to the costs of a business-as-usual emergency response and to address the persisting concerns of citizens impacted by encampments. This cost-benefit has been documented both in earlier research (Pomeroy 2006) and in a recent analysis by Dr Andrew Boozary (2024).
This third leg of the housing crisis stool is the most precariously balanced. Things could be substantially improved with some carefully designed and targeted interventions with appropriate funding. However, if a new government fixates on deficit reduction, as did the Chretien-Martin administration in the mid 1990’s, a lack of investment in this issue will result in persisting encampments and local civil unrest.
Looking at 2025 and beyond, the overall housing situation and conditions for most (except the homeless) should marginally improve.
That said, investing to help the non-profit community housing sector expand, both via new construction and by acquiring existing private rental properties could accelerate an increase in the number of affordable rental opportunities that can be protected against any resurging and speculative market pressure, and can also create more secure opportunities for those exiting homelessness.
While the media and headline editors frequently use phrases like a “market recovery” and “strengthening home prices” this is not what we need or are likely to get. That’s a good thing.
If we want to see improved affordability and move beyond a housing affordability crisis, we need home prices and rents to stagnate, or at most increase only at the rate of inflation, as they did through the 1990’s.
Those homeowners that benefitted with very large price gains and thus accumulated appreciation over the past few decades have this benefit baked into their assets and personal investment portfolios. They don’t need more excess appreciation, at the cost of the next generation being locked out of ownership, faced with unaffordable rents or the persistence of encampments on their doorstep parks.
With stabilized rents and prices, alongside strategic investments to grow the economy which can provide employment with good incomes, improvements in income and capacity to pay will gradually improve housing affordability. Hopefully by the end of the current decade the phrase housing affordability crisis will be only a point of historical reference.