What mortgage reforms mean for homebuyers

It’s now well documented that one of the major pressures on housing affordability is a lack of housing supply – something that the Canadian Home Builders’ Association (CHBA), has been warning about for many years. When there aren’t enough homes to meet demand, home prices go up – it’s economics 101. We need more homes in the places people want to live, and more of the types of homes that they need.

A home’s affordability is determined by three factors: Price, mortgage rules and the buyer’s income. Housing affordability is a balancing act. If incomes don’t keep up with the pace of inflation, if house prices rise too quickly, or if mortgage rules don’t allow for well-qualified buyers to purchase a home, then the balance is broken and affordability suffers. And that’s what Canadians have been experiencing over the past 15 years, resulting in falling homeownership rates.

More homes, more access

Our chronic lack of housing supply is one of the biggest factors driving house price increases. Two years ago, the federal government stated that we need to more than double annual housing starts over the next decade and build 5.8 million homes to house people and address affordability. However, we haven’t seen a notable increase in housing starts since then, although the need is clearly there. So why aren’t we building more homes?

For builders and developers to begin construction, they need to have buyers. But right now, home prices and mortgage conditions have been keeping buyers out of the market. Although interest rates are starting to come down, they have not yet come down enough to result in more new-home buying and building activity – and if we are to double housing starts, lower interest rates alone will be insufficient. Meanwhile, the over-tightening of mortgage rules (there have been more than 60 changes to mortgage rules over the past 15 years) has resulted in well-qualified buyers, especially first-time buyers, being locked out of the market. The only way to close the supply gap to avoid rapidly escalating house prices in the future is to be able to build more homes now, and access to mortgages to enable that is key.

On Sept. 16, 2024, the federal government announced that moving forward 30-year amortization periods will be available to all first-time buyers on any home (new or resale). This option of a 30-year mortgage is already available for uninsured mortgages, that is buyers who already have a 20-per-cent down payment. So, if you have help from the “bank of mom and dad” and you can get 20 per cent down, you can get a 30- or even 35-year mortgage. Furthermore, if you’re a move-up buyer with 20-per-cent equity, you can also already get a 30-year (or more) mortgage. But if you’re on your own, trying to buy your first home, and can’t get 20 per cent down, you’ve been previously restricted to a 25-year mortgage, which makes no sense. This has been unfair to the next generation of Canadians, especially those without homeowning parents to help out. The result has been falling homeownership rates. This change will help with that, while driving more construction.

The government is also extending 30-year amortizations to all buyers of new construction homes (not just first-time buyers). This will also stimulate more new home construction, since move-up buyers who don’t yet have 20 per cent down for their next home (for example, someone selling their condo and moving into a townhome as their family grows) will also now be able to qualify for their next mortgage. The increase of the insured mortgage cap from $1 million to $1.5 million will also be very helpful, especially in expensive markets such as Toronto and Vancouver.

Explore every angle

While some have voiced concern that these changes will result in increased home prices, it is helpful to note that Canada Mortgage and Housing Corp. previously assessed the impact on house prices if there were 30-year amortizations for all insured mortgages, and estimated that it would result in a home price escalation impact of only 1.0 to 2.4 per cent. So, the impacts of these more targeted changes will be less than that, while creating much more housing supply to keep rapid price escalation at bay.

We need to remember: The biggest risk of price escalation comes from lack of supply. So, mortgage rule changes that will enable the construction of thousands of more new homes is a very positive move for affordability. And its impact on prices will be much less than the double-digit price inflation that has been coming from the lack of housing supply. In fact, more supply reduces price inflation – again, economics 101.

This is not to say that Canada doesn’t also need to do a lot when it comes to the actual costs of homes, including taxation on them. Cost increases have come in the form of land and building material costs, skyrocketing development charges and taxes, and municipal processes and delays that also drive up construction costs. We need to come at the housing affordability crisis from every angle – and mortgage rules is part of that solution mix.

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