A real estate sold sign stands in front of house in Oakville, Ont..Richard Buchan/The Canadian Press
Christopher Alexander is president of Re/Max Canada.
Canada is in the throes of an affordability crisis. For those in need of some good news, the latest report shows inflation has cooled to 2.5 per cent, and the Bank of Canada delivered a third consecutive interest-rate cut in its Sept. 4 announcement, with the benchmark rate now sitting at 4.25 per cent.
Now, the bad news: shelter costs, including rent and mortgage payments, are still the biggest contributor to total inflation, and a significant hit to Canadians’ pocketbooks.
So, why is government policy still making home ownership even more difficult than it needs to be?
Let’s look back to 2016: interest rates were low, and homebuyers were active, potentially taking on more mortgage than they could afford, according to the Office of the Superintendent of Financial Institutions. The stress test was introduced to ensure Canadians could carry their debt, should interest rates rise.
Rising interest rates didn’t happen for some time, with the Bank of Canada dropping its benchmark interest rate to near zero during the pandemic, and many lenders’ posted rates at multiyear lows.
At the time, it was wise to take steps to safeguard Canada’s financial system, by testing the qualification of high-ratio borrowers against a rate of either 5.25 per cent, or their contracted rate plus two percentage points – whichever was higher. The stress test was credited with preventing a swath of foreclosures when rates eventually started climbing in 2022 and 2023.
But in today’s higher interest-rate environment, it has become counterintuitive policy, serving only as an additional barrier for first-time homebuyers. Reports show that over the last couple of years, lack of affordability and high interest rates have sidelined first-time buyers in Canada’s major housing markets, while those who do not need to borrow as much – such as move-up buyers and some investors – are taking advantage of softer values and healthier inventory levels.
Entry-level buyers have all but disappeared from cities where they grew up and have roots, such as Vancouver, Toronto, Calgary and even Halifax to an extent. Without significant savings, financial support from the Bank of Mom and Dad, or a strategy to address ongoing housing supply issues, first-time buyers who call these cities home will continue to be locked out.
In the absence of a national housing strategy – which is essential and non-negotiable, in my opinion, but which likely will not come for a while – the federal government should reconsider policy measures such as the stress test, which has not stood the test of time. The stress test has also intensified the rental market frenzy, as those who no longer qualify for mortgages are forced to rent, compounding the problem.
Housing aside, first-time buyers are facing a prohibitive cost of living. A 2024 Leger survey commissioned by Re/Max reveals that 28 per cent of Canadians are considering moving to another country due to affordability challenges, and 25 per cent are reconsidering whether to have children or start a family. And independent data from Leger shows that more than half of Canadian millennials and Gen Zers say they’re living from paycheque to paycheque.
Despite affordability challenges, the Leger-Re/Max survey found a majority of Canadians (73 per cent) still perceive home ownership as the best long-term investment they can make; however, the rate is lower among those aged 18-24 (68 per cent) and those aged 25-39 (66 per cent). Confidence in the market among first-time buyers isn’t what it could be or should be. Let’s be clear: I am certainly not advocating for Canadians to purchase homes beyond their means, but the reality is that the conditions under which the stress test was initially introduced no longer reflect the current landscape across the country, or the importance of achieving affordability for Canadians.
While we wait on our federal, provincial and municipal governments to deliver a cohesive national housing strategy, I encourage them to re-evaluate policies to ensure they are having a positive impact and explore ways to alleviate costs for first-time homebuyers. Ending the stress-test requirement would be a great start.