Contrary to the dominant narrative of a housing shortage, mounting evidence suggests that the real issue facing North American real estate markets is an affordability crisis driven by elevated interest rates, economic distortions, and a growing divergence between home prices and household incomes. With recent escalations in U.S. tariffs, evolving demographic patterns, and global financial shifts, the stage is set for a pronounced correction in residential housing prices.
Reframing the Narrative: From Housing Shortage to Affordability Crisis
Supply Metrics vs. Demand Capacity
Housing starts and completions remain at or above long-run averages in major metropolitan areas, yet mortgage originations, affordability indices, and bidding-auction activity have all declined sharply in the last three years.
Elevated Inventory Levels
Existing home inventories have swelled to multi-year highs. Canada’s major markets now have 6.2 months of supply (up from 4.1 in 2021), and U.S. coastal metropolitan areas have 5.8 months (up from 3.5), indicating a shift from scarcity to surplus that amplifies downward pricing pressure.
Price-to-Income Ratios
In Canada’s largest cities, the average home now costs more than nine times the median household income, up from five times in 2015. U.S. coastal markets show similar spikes (e.g., Los Angeles at eight times) – levels that typically precede sustained price corrections.
First-Time and Middle-Income Buyers Squeezed
Surveys indicate that over 40% of prospective buyers have paused their searches due to rising mortgage costs, higher down payments, and fears of overpaying.
Interest Rates, Leverage & Stress Indicators
Mortgage Cost Explosion
Since 2021, typical monthly payments on a 30-year fixed mortgage have climbed by over 65% in Canada and by 55% in the U.S.
Stress Test Outcomes
New regulatory stress tests, such as five-year rate shock scenarios, have reduced approval rates by 25% in Canada and by 18% in the U.S., forcing lenders to tighten their lending criteria.
Rising Delinquencies & Defaults
Although still below historical crisis levels, delinquency rates on variable-rate product lines have begun trending upward, particularly among subprime borrowers and converted adjustable-rate portfolios. Notably, in Ontario (the anticipated epicenter of the downturn), mortgage delinquency rates increased from 0.25% in late 2024 to 0.45% in early 2025 — well above the national average and signaling acute stress in auto-manufacturing regions.
Employment Trends & Wage Growth
Job Growth Correlation
Historical data indicate that year-over-year employment growth explains over 70% of regional home price appreciation, outweighing the impact of modest rate changes.
Unemployment Shocks & Price Declines
Regions experiencing a 1% rise in unemployment (e.g., Ontario’s auto belt during tariff disruptions) have suffered 3–5% immediate price drops, compared to 1–2% declines associated with equivalent mortgage rate shocks.
Wage Growth vs. Price Growth
Real annual wage growth of 2–3% in tech hubs such as Toronto and Seattle has partially offset affordability pressures and kept prices elevated, while flat or declining wages in manufacturing regions have accelerated corrections.
Sectoral Shifts
As Canada’s service sector employment expands, markets tied to office-worker relocation — such as Ottawa and Calgary — show more price resilience, contrasting with auto- and resource-exposed areas.
Commuting & Remote Work Impacts
Employment decentralization driven by hybrid work models has shifted demand toward mid-sized cities, with price gains of 5–7% in markets such as Hamilton and Halifax despite national affordability headwinds.
Demographic & Migration Dynamics
Aging Population & Downsizing
Baby boomer downsizing, projected to intensify over the next decade, will add to supply in suburban markets, while demand for entry-level housing remains constrained.
Post-Pandemic Migration Reversal
Census and Statistics Canada data show net outflows from high-cost urban cores back to secondary cities, as remote work flexibility wanes due to corporate return-to-office mandates.
Rental Market Pressures
Vacancy rates in major metropolitan areas have ticked upward — from 2% to 4% in the U.S. and from 1.5% to 3.2% in Canada — over the last two years, signaling potential softening in rental growth and a decline in investor appetite for buy-to-rent strategies.
The Impact of Trump-Era Tariffs
Auto Manufacturing Regions in Canada
Ontario’s Windsor–Detroit corridor projects an 8–12% decline in auto exports, translating into 2,500–3,500 lost jobs and a potential 5–7% drop in local home prices over the next year.
Composite housing transactions in Kitchener–Cambridge–Guelph are down by 9% year-over-year since March 2025.
Construction & Input Costs
Twenty-five percent tariffs on steel and 15% on lumber will raise per-unit homebuilding costs by an estimated C$20,000–C$25,000 and slow housing starts by 6–9% throughout the remainder of 2025.
Consumer Sentiment
Consumer confidence in Canada fell from 102 to 89 between January and April 2025. Historically, readings below 90 have preceded a 3–5% cooling in housing activity.
Conclusion & Protective Strategies
North American housing is poised to be the next major asset class to correct under the weight of stretched affordability, elevated inventories, mounting household and investor leverage, and credit-market retrenchment. As employment shocks, HELOC pullbacks, and rising delinquencies converge, the housing sector faces pronounced downside risks.
Protective Measures
- Stay Flexible on Policy Shifts: Position for potential systemic relief — keeping options open on adjustable-rate resets and government incentive programs.
- Diversify Away from Direct Homeownership: Consider rental strategies or fractional real estate vehicles that reduce balance sheet exposure.
- Increase Liquid Reserves: Maintain at least 6–12 months of cash or cash-equivalent holdings to weather potential drawdowns and margin calls.
- Use Hedged Real Estate Instruments: Utilize inverse REIT ETFs, mortgage-backed security shorts, or housing futures (where available) to hedge price declines.
- Balance Credit Portfolios: Shift consumer-credit allocations toward lower-risk tranches and shorter maturities; monitor issuer balance sheets for stress signals.
- Allocate to Precious Metals: Include gold and silver allocations to preserve value and hedge against inflation, currency depreciation, and broader market stress.
About Moneta
Moneta is a boutique investment banking firm that specializes in advising growth stage companies through transformational changes including major transactions such as mergers and acquisitions, private placements, public offerings, obtaining debt, structure optimization, and other capital markets and divestiture / liquidity events. Additionally, and on a selective basis, we support pre-cash-flow companies to fulfill their project finance needs.
We are proud to be a female-founded and led Canadian firm. Our head office is located in Vancouver, and we have presence in Calgary, Edmonton, and Toronto, as well as representation in Europe and the Middle East. Our partners bring decades of experience across a wide variety of sectors which enables us to deliver exceptional results for our clients in realizing their capital markets and strategic goals. Our partners are supported by a team of some of Canada’s most qualified associates, analysts, and admin personnel.