(Bloomberg) -- One of Canada’s biggest banks says housing affordability is poised to gradually get better — but not enough to bring it close to pre-pandemic levels.

A combination of falling interest rates, roughly flat home prices and rising incomes will make buying a home easier for more Canadians, Bank of Montreal economists Robert Kavcic and Sal Guatieri wrote in a report to investors. Even in this scenario, however, affordability will still be “strained” by 2027, they said. 

Their forecast assumes a decline of 75 basis points in five-year mortgage rates to 4.25% and flat home prices in 2024, followed by three years of 3% annualized price growth and per-capita income growth of just under 3%.

The report underscores the challenges faced by policymakers who are dealing with frustration, particularly among younger Canadians, over the cost of housing. “We do see progress, but it’s going to take a long time to unravel something that took years to develop,” Guatieri said in an interview. 

Prime Minister Justin Trudeau — whose party is lagging Pierre Poilievre’s Conservatives in the polls — has announced billions of dollars to accelerate home construction. Still, the government’s housing agency says that homes are not being built quickly enough to keep pace with rapid population gains. 

A surge of temporary residents such as foreign workers and students pushed the population growth rate last year to 3.2%, one of the fastest in the world. It’s a “historic demand shock,” Guatieri and Kavcic wrote. 

The key driver of home-price growth is demographics, Guatieri said. “Even though the federal government is planning to curb the number of non-permanent residents, which will ultimately slow population growth maybe to 1% or a little more, we still will see positive population growth.”

In contrast, an immediate return to “normal” affordability levels would require either a 15% drop in home prices, a 25% jump in incomes or a plunge in mortgage rates to 3% or lower, the economists say — assuming all other factors remain equal. 

In an interview with Bloomberg last year, Housing Minister Sean Fraser said the government’s goal was to make shelter more affordable without driving down home prices. Trudeau echoed that in a recent interview with The Globe and Mail, saying: “Housing needs to retain its value.”

©2024 Bloomberg L.P.