Federal Affordable Housing Push Could Shift Rental Market

Despite plummeting mortgage rates and an influx of supply in major urban centres, housing affordability remains a persistent issue in Canada.

According to a Royal Bank of Canada (RBC) Housing Trends and Affordability report, the share of household income needed to cover mortgage payments, property taxes, and utilities has reached levels unseen since the early 1980s. Most middle and low-income households in the country have had to tighten household budgets to survive, even as inflation slows.

RBC’s most recent quarterly update reveals what many Canadians are already feeling. Most households have to dedicate nearly 63 per cent of their income to owning a home. This figure marks the worst national affordability since 1982 and is significantly above the long-term averages seen over the past four decades. High interest rates, which result in higher mortgage costs, are the primary contributors to this crisis, the report authors say.

Data from the RBC housing affordability report indicates that rising mortgage costs alone have pushed the affordability index to record highs, exceeding 60 per cent. Even with home prices flattening or modestly correcting, the jump in interest rates has been enough to allow affordability to metastasize into a disaster in recent years.

Over the last few years, the Canadian real estate market witnessed home prices surge by 40 per cent. Driven by low interest rates, strong demand, and limited supply, this boom resulted in high purchase prices. The problem is that wages have grown modestly and have not kept pace with the increasing costs of housing. Recent Canadian Mortgage and Housing Corporation (CMHC) statistics indicate that the country still requires approximately 500,000 new units per year to address the shortage. However, progress has been slow, with experts estimating that fewer than 40 per cent of the target has been met.

While Toronto and Vancouver are known to be very expensive in terms of housing costs, RBC data show that housing affordability has deteriorated in all tracked regions, with Canada ranking among the least affordable advanced economies. Affluent Canadians may not feel the brunt, but average Canadian households have observed a divergence between incomes and home prices. High housing cost means less disposable income for essentials like food, transportation, education, and healthcare.

For many households, especially first-time buyers, this translates to a strained monthly budget.

Surveys suggest that many Canadians, particularly the young generation, have abandoned the idea of buying a home. Unfortunately, this has led to a separate problem arising: an increase in demand for rental units, which is pushing up rental prices and squeezing low- and middle-income households.

Addressing Housing Affordability Takes Time

As Charles Dickens wrote in A Tale of Two Cities, “It was the best of times. It was the worst of times.”

A chorus of analysts, including economic experts at RBC, point out that improvements in housing affordability will take time. Even with interest rate cuts and rising incomes, affordability remains near historic lows. It may take some time to restore balance through lower home prices, steady interest rates, and increased housing supply.

On the rate front, the Bank of Canada has lowered interest rates by a sizable amount over the past 12 months; the key policy rate sits below three per cent, offering relief on mortgage costs (hovering around five per cent). The rate path remains unclear as monetary policymakers navigate through the tariff and trade turbulence.

Of course, the situation goes beyond interest rates. Incomes also need to become more stable, and the lack of accelerated growth in Canadians’ pay and the spike in home prices have been caused by cratering productivity, say economists at Scotiabank.

“The key takeaway from our work is that supply constraints remain a considerable obstacle to affordability. It is simply impossible for home prices and affordability to return to pre-pandemic levels without a substantial increase in productivity,” they said in a March 2025 research note.

“Ultimately, increasing productivity growth in residential construction, by reducing stringency of regulation and bureaucratic burdens, will make housing supply more responsive, which is the best option to sustainably reduce house price growth and improve affordability by better aligning house price growth with that of households’ income.”

Housing affordability in Canada is experiencing some bright spots for new homebuyers. Since the 2022 peak, the Canadian real estate market has experienced a 14 per cent decline in home prices. Similarly, there has been a growth in nominal wages of around 4.4 per cent year-over-year. This has provided some breathing room to Canadians.

Sustaining this momentum depends on labour market conditions and inflation trends.

Ottawa is attempting to facilitate improving affordability. The Federal Housing Accelerator Fund and municipal zoning reforms, for example, aim to alleviate local housing shortages by promoting a wider range of housing styles. Programs like CMHC’s subsidies, first-time homebuyer amortization flexibility, and GST rebates may also reduce upfront costs.

Caution: Work Ahead

The RBC housing affordability report’s warnings remain valid, and housing affordability for average Canadians is still at its worst level since 1982. Affordability remains the most pressing issue for people, and those aiming to buy have had to scale back their homebuying ambitions as they simply cannot afford to make mortgage payments. A large number of Canadian households struggle to obtain mortgage approval altogether.

The housing affordability crisis, primarily driven by monetary policy over the last few years, inflated home prices, and an unsustainable income-to-cost ratio, will still be addressed in the coming years. Signs of relief are emerging, but whether this relief is long-term remains to be seen.

What should Canada strive for? The definition of housing affordability is 30 per cent.