September 19, 2022

Market Trends

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Canadian Real Estate Hasn’t Been This Unaffordable Since The 90s Bubble: BoC Data

Canadian real estate affordability is getting worse as the market adjusts to higher rates. A Bank of Canada (BoC) update to its Housing Affordability Index (HAI) shows a sharp climb in Q2 2022. An average household now requires nearly half their income to service a mortgage. It’s a level rarely seen in Canada, and experts don’t see it lasting very long as prices drop.

Housing Affordability Index (HAI)

The BoC HAI shows the share of disposable income needed to service an average mortgage. Carrying costs include mortgage payments including interest, and utilities. Disposable income is what a household takes home after mandatory deductions. The higher the ratio, the more difficult it is for buyers to get into the market and carry a mortgage.

Bank of Canada Housing Affordability Index

The share of disposable income a typical household needs to carry the mortgage and utilities for a home.

 

Canadian Households Need To Spend 48% of Income On A Mortgage

The BoC observed one of the worst erosion of housing affordability in the history of the country. The HAI is up to 48.2% in Q2 2022, meaning an average household needs to shell out nearly half their take home pay to carry a mortgage. Keep in mind, the median income across the country is fairly similar, but this is a national number. 

Housing affordability has seen a sharp increase over the past couple of years. The previous quarter came in at 42.2%, so Q2 has seen a 6-point increase. However, from the first full quarter of nearly zero interest (Q2 2020) to Q1 2022, the index rose 12 points. The problem isn’t just rising rates, the excess demand is an issue as well.

Canada Hasn’t Seen Affordability This Bad Since The 90s Bubble

The HAI is at the worst level in over three decades. It hasn’t been this high since Q3 1990, during the early ‘90s real estate bubble. Other than Q2 1990, no other quarter was higher — you’d have to go all the way back to the early 80s to find something worse. 

However, those previous periods were extremely brief, low volume periods for home sales in Canada. Very few people executed a sale at those levels, and the peak was short-lived as prices made sharp declines shortly afterwards. It wasn’t until the current quarter we’re in that home prices began to really pull back as rates climbed. Banks have forecast the decline for real estate will kick off with an “enormous” shock in the coming months. This is expected to improve housing affordability, despite rising interest rates.

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