Top factors impacting affordable housing for first-time home buyers

For first-time home buyers, entering the housing market has become increasingly difficult. According to the Canadian Real Estate Association (CREA), home sales declined by 2.1% year over year from August 2023 to August 2024. 

While rising home prices are often viewed as the main culprit, the challenges extend far beyond the cost of property. A variety of economic factors, such as escalating living expenses, stagnant income growth, and mounting debt, also play critical roles in exacerbating affordable housing problems. 

Let’s explore how these broader economic pressures create obstacles for potential home buyers.

Home prices

Over the past few years, home prices have skyrocketed, particularly in major cities such as Toronto, Vancouver, and Montreal. The rapid appreciation of property values has effectively pushed many buyers out of the market, forcing them to delay their homeownership dreams. This has led many to wonder, “Will houses ever be affordable again in Canada?”

A forecast by the CREA shows that the national average home price will rise by 5% from 2024 to $729,319 in 2025. This continued spike in price contributes to the lack of affordable housing. 

As a result, many first-time buyers are staying in the rental market longer. Renting in Canada has become more burdensome, with almost half of Canadian renters spending more than 30% of their income on rent, far exceeding the typical affordability benchmark. This higher burden makes it even harder to save for a down payment and eventually buy a house.

Read more about home affordability in Canada.

Credit card debt

As more Canadians, particularly renters, struggle to keep up with escalating living expenses, many are relying heavily on credit to make ends meet. 

Bank of Canada (BoC) Governor Tiff Macklem recently expressed concern over the increasing number of renters with high credit card balances. In fact, a growing share of Canadians without mortgages now carry credit card debt that exceeds 90% of their credit limit. 

Also read: How to pay down credit card debt with a personal loan

High credit card balances increase monthly expenses due to interest payments and negatively impact credit scores. Even if someone saves enough for a down payment, their low credit score may lead to higher mortgage interest rates due to unfavorable mortgage terms.

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Living costs

According to Statistics Canada, 45% of Canadians reported that rising prices affect their ability to meet day-to-day expenses, up from 33% just two years ago.

Although Canada’s inflation rate fell to 2% in August 2024, finally hitting the Bank of Canada’s target, the effects of the previous inflationary surge are still being felt by many Canadians. The high cost of essentials like food, utilities, and transportation continues to eat into disposable income, making it difficult for potential home buyers to save funds for a down payment. This financial strain is especially hard on renters, who are already struggling with high rental costs.

Uneven income growth

Another major challenge facing first-time home buyers is the slow and uneven growth of income, especially for renters who tend to have lower incomes than homeowners. StatCan found that renters had an average disposable income of $14,867 in the first quarter of 2024, compared with $27,994 for homeowners. This income gap makes it harder for renters to manage rising living costs, save for a down payment, or build wealth.

Additionally, renters spent 33.3% of their income on housing, significantly higher than the 22.8% spent by homeowners. As a result of these lower incomes and higher housing costs, renters struggle to save for a home.

Government policies

Government policies like buyer incentives, in addition to BoC interest rate cuts, aim to make it easier for Canadians to get into the housing market. However, as Macklem points out, it's important to balance making homes affordable with keeping the economy stable. Let’s look at some key government policies and how they affect home buyers:

• Rate Cuts: The Bank of Canada recently lowered its overnight lending rate to 4.25%, which has led to a decrease in mortgage rates. For example, 5-year fixed mortgage rates have dropped to 3.94%, reducing monthly mortgage payments and making it easier for new buyers to afford a home.
• Amortization changes: The government has extended the maximum amortization period for first-time home buyers to 30 years. This means you can now spread your mortgage payments over a longer period making monthly payments smaller. While this reduces the immediate financial burden, it also means paying more interest over the life of the loan.
• Mortgage insurance: The rules for mortgage insurance have also changed, increasing the purchase price limit for insured mortgages to $1.5 million from the previous $1 million. This allows buyers in expensive markets, like Toronto and Vancouver, to qualify for insured mortgages with smaller down payments, making it easier to get into the market.

Read more about amortization and insurance changes.

How to navigate the lack of affordable housing in Canada

Here are a few ways first-time home buyers can improve their chances of how to afford a home:

1. Focus on debt management. High levels of debt, such as credit card balances or personal loans, can negatively affect your credit score and make it harder to get approved for a mortgage. Pay down high-interest debts first and keep your credit utilization low to improve your financial profile.
2. Stay informed about interest rate trends. Mortgage rates can fluctuate based on changes in the Bank of Canada’s interest rates. Keeping an eye on these trends can help you lock in a favourable rate when the time is right. 
3. Explore affordable markets. If home prices in major cities like Toronto and Vancouver are out of reach, consider exploring more affordable housing markets in other regions. Smaller cities or suburban areas often have lower home prices and may still offer growth potential.
4. Leverage government programs. Initiatives like the First Home Savings Account,  GST/HST New Housing Rebate, and extended amortization periods can provide financial relief. Be sure to research all available programs and use them to ease the financial burden of buying your first home.

The bottom line

While the market presents many affordable housing challenges, it's important for first-time buyers to remember that the landscape is constantly changing. Economic pressures such as inflation, interest rates, and housing policies will continue to fluctuate, creating new opportunities. Stay financially disciplined and ready to act when the market shifts in your favour.

Also read:

• 2024 Canada First-Time Home Buyer's Guide - Programs & Incentives
• Federal Government cancels the First Time Home Buyer Incentive
• GTA home prices eased in August as condo sales plummet