Canadian real estate has never exactly been cheap, but it’s rarely this unaffordable. The Bank of Canada (BoC) Housing Affordability Index (HAI) hit a 32-year high in Q3 2022. That means it’s nearly impossible for an average household to buy a home right across the country. The cost of housing has breached an unsustainable level that has never lasted very long.
BoC Housing Affordability Index
The BoC Affordability Index shows the share of income needed to carry the cost of buying a home. Only mortgage and utility payments are included, so the real cost is higher. Income used is the average household disposable income. Home prices are a six-month moving average of those sold on the MLS. Mortgage rates are a weighted basket of 1-,3-, and 5-year fixed rates, as well as the discounted variable rate. Utilities used for payments include water, fuel, and electricity.
Conceptually, it’s similar to the affordability indexes produced by RBC, and NBF. The higher the ratio, the less affordable it is to buy and carry the payments on a home. Unlike RBC and NBF, the BoC uses average income, which tends to skew higher than the median for households. Average home prices also fail to account for quality and size, which is why other indexes at least use a median. Many use a benchmark price, which adjusts for those issues.
The BoC index is not our preferred housing affordability index for actual costs. However, it’s still useful for trend confirmation and knowing the issue is monitored. Whether they use this data or care what it says is a totally different story.
Canadian Housing Affordability Is Eroding Rapidly
Canadian real estate became less affordable in the latest quarter, shows the index. The HAI estimates an average household needs to spend 48.8% of its income to carry a home in Q3 2022. It’s up 0.4 points from the previous quarter, and 11.1 points from last year. The monthly increase was contained by falling home prices. Even so, annual growth at over 11 points is still an absurd move when it comes to the erosion of affordability.
Bank of Canada Housing Affordability Index
The share of disposable income an average household would need to service a mortgage and utilities.
Source: Bank of Canada; Better Dwelling.
Canadian Real Estate Prices Are Never Stable At This Level
Housing affordability is now the worst in over 30 years, according to the index. The share of income needed is the highest since Q3 1990, with only two quarters in the 90s coming in higher. In total, only 8 quarters in the past 50 years have been less affordable according to this measure. Rivaling two of Canada’s biggest bubbles is less than ideal, to say the least.
The index has reached a critical level, an issue confirmed by multiple banks. Earlier this month, NBF warned buyers face the worst affordability since the early 80s. RBC calculations shows we reached the worst affordability ever, surpassing the early 80s. It doesn’t matter which one you’re looking at, none of these data points are good news.
The takeaway is the same—Canada’s housing affordability has reached unsustainable levels. There’s always the risk it can get worse, which some firms expect in the short-term. However, the issue has never persisted for long. Countries where the average household would be in shelter poverty, tend to provide a poor value proposition.