Navigating a Crazy Canadian Housing Market

Difficult Housing Markets

In regions such as the Greater Toronto Area, the housing market can be stubbornly difficult. The Canadian Real Estate Association reported that the average sale price of a home in the GTA in April was $1.106 million, up 2.4% from the previous month and 2.5% from three months before that.

True, prices are down by 12.2% from early 2022, when interest rates were still at rock bottom. But prices are still up a shocking 36% from the early days of the pandemic in 2020.

Credit unions need to be both prudent and effective, and that makes it important for them to be both customer-focused and understand the market’s larger trends, says Mike Moffatt, assistant professor at Western University’s Ivey School of Business in London, Ontario, and senior director of policy and innovation at the Smart Prosperity Institute, a research and policy think tank.

Stable or dropping prices may only be temporary. For example, between March and April 2023, prices declined in such rural and cottage areas in Ontario as Bancroft and the Kawartha Lakes, but prices in Mississauga and Hamilton, where many first-time and step-up buyers go house hunting were up by 4.7% and 5.4%.

“In general, home prices started to decline when interest rates went up [starting in March 2022] but those declines have largely gone away. Prices are creeping up,” Moffatt says.

Challenges in Smaller Centres

It’s not only large centers such as the GTA or British Columbia’s Lower Mainland (which includes Greater Vancouver) that are seeing upward price pressure. There’s also pressure in mid-sized and secondary markets, particularly those where there are a lot of university students who need housing, Moffatt says.

“In a lot of these college and university markets, we’re seeing rents go up as much as 25% year over year. These kinds of increases filter through the entire market, as people buy up condos and single-family homes and convert them into student rentals,” he says.

College and university towns in Ontario now have “chronic housing shortages,” Moffatt told the Globe and Mail in May. “We have seen enrollment go up substantially since about 2015 … but colleges and universities have barely built any student residences in the last 10 to 15 years,” he said.

There’s also some continuing demand for homes outside the larger centers as workers push to work from home and avoid commuting to offices.

This trend slowed down after the pandemic waned, Yu says. “The movement toward smaller centers has been shifting, but some of the changes in the economy that have taken place since the pandemic started are still percolating.”

And in any case, Moffatt notes, “the inventory of housing is still pretty low and it’s still largely a seller’s market.”

Government Programs and Policies

Federal, provincial and municipal governments and the building sector are all pushing new policies that they believe would increase the housing supply. Credit unions can help by working with all levels to help shape these policies so they work effectively, Moffatt says.

“A lot of it is going to come down to government relations. With their strong community roots, credit unions have a large megaphone that they can use to talk about the need for more housing supply and more affordability,” he says. 

Credit unions can also work directly with governments, particularly municipalities, to help both officials and developers navigate regulations and programs to get more housing in front of prospective buyers more quickly, McQueen says.

“Typically, the loudest voices against the types of development ideas we need are those that are already there: the ‘not in my backyard’ crowd. Credit unions can play a role in amplifying the voices of first-time home buyers and those who require more affordable housing options, and work with municipalities to find creative solutions more quickly. We can also work to build expertise and align ourselves with developers and builders who cater to first and step-up home buyers,” he says.

Moffatt, Yu and McQueen are all watching closely the housing policy changes that different governments have brought in, and how they might affect lenders. For example, in May 2023, the City of Toronto voted to legalize two-, three- and four-unit multiplex dwellings, which until now were not allowed by zoning in many parts of the city. Toronto’s City Council also signed onto a provincial plan to build 285,000 homes in the city within 10 years.

While these kinds of policy changes may boost the housing supply, they also require credit unions to reexamine their lending criteria, Yu says.

“Are these triplexes and fourplexes commercial properties or residential? There may be different lending criteria depending on whether you look at it as lending for a larger commercial development or for someone simply expanding their home to create a few more units,” he says.

There’s no single answer, Yu adds. “This is something that will likely have to be considered credit union by credit union.”

There are many other government policies in place or on the way; some of them may help ease the housing crunch but others may not, Moffatt says. An important role for credit unions is to navigate the different programs, he says. It’s hard work determining which programs work best to help communities provide more housing and also how to help members access the programs that work best for their particular situations.

The federal government offers three main programs aimed at first-time buyers. The First-Time Home Buyer Incentive offers eligible buyers 5% or 10% of the funds toward a down payment; those eligible must have annual incomes no greater than $120,000 ($150,000 in Greater Toronto and Vancouver), and the incentive must be paid back within 25 years.

Another federal program, the Home Buyers’ Plan, allows first-time buyers to withdraw up to $35,000 from their Registered Retired Savings Plans in a calendar year to apply toward a down payment on an eligible home. The withdrawal must be repaid within 15 years.

There’s also a federal home buyers tax credit, which first-time buyers can claim in the year they buy or build a home.

Reaching Out to Members

It’s almost certain that most credit union members who are first-time buyers will need help working through these programs and their mortgage options. Some credit unions offer options that are tailored to such buyers.

For example, $26.2 billion Meridian Credit Union, the largest CU in Ontario, offers high-ratio mortgages that allow buyers to put less than 20% down, as well as providing advice on how to structure a mortgage that involves funds being contributed by friends and family members. Mortgages with friends can be complicated; they involve joint ownership and liability, and Meridian CU recommends that prospective joint owners get legal advice before jumping in.

In early June, Jay-Ann Gilfoy, Meridian CU’s president/CEO, wrote an op-ed in The Globe and Mail that she supports new approaches to home ownership and new funding methods.

“My team and I at Meridian are bullish on innovations like co-ownership mortgages that allow buyers to purchase a percentage ownership in a building,” she wrote. “We support shared equity-appreciation lending that allows families on modest incomes to afford the down payment on a home and share in the equity appreciation of that home over time with a patient investor.”

As well, she called for increased use of community investment bonds that provide investors with a competitive return while supporting the construction of attainable housing.

Working with developers, provincial and local governments, and community groups to provide more housing can be even trickier for credit unions, but it’s important to try, Moffatt says.

“Certainly there’s a role for credit unions to work to help non-profit builders and developers who build co-op and social housing,” he says. The problem still comes down to supply though. In Ontario, British Columbia, and smaller centers with large student populations, there simply aren’t enough homes available to meet demand, so prices keep climbing.

Provincial governments, most notably Ontario, have moved aggressively to change the conditions to better support developers in providing more housing, overruling municipal zoning restrictions, and eliminating rules that prevented building on floodplains or protected greenspace. But many of these measures are mired in controversy, face stiff opposition, and in some cases, may be challenged in court.

Bold reform of some kind is necessary regardless, Moffatt says. Credit unions can help most at this point by understanding what reforms might work and helping members understand what the changes mean.

Explaining and Encouraging

“Explaining is definitely a role that credit unions can take. I think a lot of the programs and changes are not that well understood,” Moffatt says.

“Overall, I think the Ontario reforms are moving in the right direction —though not by opening the Greenbelt [protected greenspace]. The big challenge is the speed of things,” he adds.

“Ontario commissioned a housing affordability task force that reported its findings in February 2022. They came out with 55 recommendations, but the government has implemented only about one-third of them,” he notes.

The Ontario Housing Affordability Task Force urged the province to set a “bold goal of adding 1.5 million homes [to existing stock] within 10 years and update planning guidance to make this a priority.” While the Ontario government has accepted the idea, its planning updates don’t provide the necessary roadmap for how to achieve this, Moffatt explains.

For example, too little has been done to encourage the growth of transit-oriented communities, where housing is built close to or along public transportation lines, he says.

“Many developers are holding back, waiting to see if there are more [regulatory] reforms to come. If you’re a developer or a landowner, you might wait on the sidelines to see if the rules are more favorable two or three years from now,” he says.

The higher interest rates that are already locked in are an impediment not just for mortgage shoppers, but for builders who need funds to develop projects, Moffatt adds. “So, you’ve got a highly uncertain regulatory environment coupled with a high-interest environment,” he says.

“We’re still not seeing the growth in supply that most of our communities need,” Libro’s McQueen says.

“Families need more affordable housing options, developers and builders are in the business of doing so profitably, and municipalities are charged with building healthy and diverse communities,” he says.

A reform Moffatt says he’d like to see is to have the federal government bring back tax credits that builders used to enjoy when they developed rental properties.

“In fact, we used to do just this. Until 1972, depreciation rates were 10% on wood-frame buildings and 5% on concrete ones. These accelerated depreciation rates increased the rate of return in the early years of a purpose-built rental housing project,” he wrote recently in the Globe and Mail.

“Investors could keep these gains so long as they invested the proceeds into a building that cost as much, if not more, which … encouraged further building,” he said.

“Removing these incentives contributed to the collapse of new rental housing builds. In 1972, more than 35,000 new rental units began construction in Ontario; there weren’t that many rental housing starts in the entire 1990s. We could reinvent these tools for 2023,” Moffatt said.

Central 1 CU’s Yu says that every credit union can look at how to work with alternative models for housing, such as co-op developers and rent-to-own plans. These can be complicated for both lenders and mortgage holders, though, and the results and outcomes will vary, he warns.

There is a specialized role for credit unions in housing, nevertheless, he adds. In a constantly swirling housing market, they can help by continuing to do what they do best—staying close to the communities they serve, he says.

McQueen says it comes down to continually trying to answer a key question: “How can credit unions be the catalyst to help all the stakeholders work together?” cues icon

David Israelson is a non-practicing lawyer who writes about Canadian business topics.