Heather Scoffield: Priced out of the housing market? For first-time buyers it’s about to get worse

Canadians are obsessed with owning homes, and this is a problem that is about to get even thornier.

For several years now, we have been collectively complaining about homes being unaffordable, especially for young adults and especially in Canada's biggest cities.

There have been policies and incentives and subsidies. There have been interest rate hikes and interest rate cuts, growth surges, a downturn and a major recession. Elections have been fought over this.

And still, house prices rise and rise.

In October, home sales across the country rose 8.6 per cent in a single month. Prices rose 2.7 per cent on the month, and 23.4 per cent on the year.

It's not a one-month wonder. In November, home prices in Toronto rose four per cent, according to the Toronto Regional Real Estate Board on Friday. That's the third month in a row for solid increases, and now the average Toronto home is up 40 per cent over the course of the pandemic and well over 20 per cent in just the past year.

It's been a perpetual bonanza for sellers and those who own houses as investment vehicles. But it's a deal-breaker for those who are trying to move closer to work, set up a new life in Canada, move to the big city or expand to deal with a growing family.

The traditional response to this is to blame an inadequate supply of housing, turn public policy toward bolstering the building of more homes and hope the market does its thing.

But supply is not co-operating.

To wit: The value of building permits for homes is largely flat over the course of the pandemic, despite some month-to-month volatility, Statistics Canada data shows.

In the most recent report on gross domestic product - the broadest measure of how the entire economy is faring - it's clear that investment in construction and housing plunged in the third quarter.

And in the Toronto area, new listings in the GTA in November were down substantially in all segments of the market, the real estate board says.

These market conditions are extreme since the current stock of properties for sale is not sufficient to cover the number of transactions made during the month," says National Bank economist Daren King.

This market tension is about to come face to face with two federal realities: rising interest rates and parliamentary politics.

With inflation on the rise (partially related to the heat in the housing market), the Bank of Canada has signalled its intentions to start raising its benchmark interest rate by the middle of next year, with some forecasters projecting even earlier.

Mortgage rates are already on the rise, and once the central bank begins to tighten the screws, there will be an effect on how affordable homes are, says Jimmy Jean, chief economist at Desjardins.

Over the medium term, rising rates could change the market dynamic and cool off housing markets, Jean says. But the immediate effect will be to make it harder for first-time buyers to qualify for mortgages, compounding their difficulties, he says.

It's hard to see prices coming down at this stage," he adds, especially given the low inventory of homes for sale.

Add in a dollop of politics and you have a complicated future for affordability.

There's some reason for optimism. Both the Conservatives and the Liberals had hefty policy proposals in their election platforms, aiming to win middle-class and suburban votes by proposing ways to boost supply and ease the way for buyers.

The Liberals signalled in last month's throne speech that at the top of their housing policy list would be: a $4-billion housing accelerator fund" to help cities cut red tape and build more; a more flexible first-time homebuyers incentive; and a rent-to-own program.

But the Conservatives have already signalled that they're ready to rumble on this front.

In Question Period, as soon as they're done lashing the Liberals for inflation, they turn to blaming them for high house prices. And they're well aware that the criticism resonates with all those families straining to figure out their lodging.

They have proposals of their own. During the campaign, the Conservatives wanted to increase housing supply by freeing up federal land, encouraging construction of rental units and tying municipal funding to building homes near transit. And to encourage buyers, they proposed softening the stress test to qualify for a mortgage among other measures to make mortgages easier to get.

But all in all, both parties have proposals that would boost demand in the near term and aim to help supply in the long term. And neither of them would take a step back to look at why supply and demand are so persistently out of whack, or whether a fundamental cultural shift toward higher density, long-term leasing and renting may be required.

It could be that market dynamics come to their senses and even things out over the next few months. There are some projections along those lines. But history has shown we can't count on that.

Heather Scoffield is the Star's Ottawa bureau chief and an economics columnist. Follow her on Twitter: @hscoffield