Canadian Real Estate Affordability Hits Worst Level Since The 90s: Bank of Canada

Canada’s central bank found housing affordability eroded further in the first quarter. The Bank of Canada (BoC) Housing Affordability Index (HAI) showed a sharp jump in Q1 2022. Affordability is now the worst in 3 decades, with the most recent erosion due to rising financing costs. However, this is likely to be temporary as home prices adjust to more expensive borrowing costs. The index will see a short-term increase, but the trend can reverse as early as this year.

The Housing Affordability Index (HAI) 

The BoC HAI looks at housing affordability as the basic carrying costs for a home compared to income. Carrying costs are mortgage payments and utilities. Mortgage payments are calculated using a basket of discounted rates, weighted by use. Income is disposable income, which is what’s left after mandatory transfers. The result is the share of income needed to carry these payments, with higher being worse.

Canadian Real Estate Is The Least Affordable Since The 1991 Bubble

The BoC HAI ripped to the highest level in a generation, and the highest share in 3 decades. The HAI shows a household needs 42.8% of their disposable income to carry a home in Q1 2022. It’s an increase of more than 3 points from the previous quarter and 8.1 points from last year. The HAI hasn’t been this high since Q3 1991, which was the previous peak of the real estate cycle (i.e. the bubble peak).

Bank of Canada Housing Affordability Index

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

Source: BoC; Better Dwelling.

Demographic Distribution Means It’s Harder To Catch Up Without Price Corrections

Age distribution and demographics are important to understand why it’s different this time. Back in the early 90s, the median Canadian was in their early 30s. Today the median person in Canada is a third older — in their early 40s. Half the population in the 90s was below their peak earnings years, making it easier to stomach the costs. This helped to prevent the need for prices to fall as much.

Today, Millennials are expected to reach their demographic peak in the next few years. They’re already past or approaching peak earnings growth, meaning there’s not much income relief. Most of the affordability improvement has to come from falling home prices. They also can’t depend on interest rates to drop 14 points to help alleviate pain and inflate the asset.  

Then there’s the whole down payment issue at extended valuations, not factored in by the HAI. The 90s had extreme valuations, with Toronto’s average home sold at 6x the median income. Today that number is closer to 10x, so there’s a considerable gap compared to that period. This isn’t about who had it worse, but the fact that things haven’t improved over the past 30 years.  

The BoC HAI is likely to pop even higher over the next quarter but the direction is expected to change fast. Financing costs surged in Q2 2022 while home prices only made a minimal decline in the quarter. This will result in the ratio rising, but more recent activity shows this can change fairly fast.

In June, home prices across Canada fell by the equivalent of a third of a median household’s annual income. They didn’t make that drop over the past year, but just in that month. July’s data for Toronto and Vancouver also has experts seeing further national price drops. As early as Q3 or Q4, affordability can start improving — RBC is calling a “historic price correction,” while BMO recently revised their Canadian real estate outlook much lower, expecting big drops in the future. 

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  • Bruno 1 month ago

    Short-term pain. Lowering rates incentivized investments now prices need to make sense before investors will jump in. You can’t just get rid of 20% of the market and not expect a collapse in demand.

    Ownership is still a pipe dream for most of the schmucks complaining prices need to fall 50%-80%. Not going to happen.

    • Yoroshiku 1 month ago

      I suspect BOC will slash interest rates as soon as they possibly can ‘incentivize investment’ and reinflate the bubble.

    • ItsComing 1 month ago

      oh it will happen, remove those blinders. We are now in unchartered territories – global pandemic, inflation, high interest rate, supply chain issues, war, household debt of 1.86, layoffs, should I go on? if you are mortgage free, rich, etc. Good for you but I am talking about the 95% of the population. It won’t be short term pain, it will be a longgggg term pain and don’t worry about even the price goes down 50%, most people will still not be able to afford it due to high interest rate and stress test. Enjoy and keep spending, after all, we are tired of the 2.5yrs stuck at home right? this is exactly what BOC doesn’t want you to do but who cares…more interest rates coming. 100% and this will further delay controlling inflation. need some popcorn?

    • om 1 month ago

      Do you have a crystal ball??

  • Remington 1 month ago

    Even with 0% rates it’s still unaffordable for the vast majority.
    Even for investors buying million dollar properties they still have to rent them for $3500 or more just to cover the bank payments. So even to rent is so damn expensive. You now need several incomes in the home to afford the payments. Nothing like living with 20 people in a house just to get by.

    • Yoroshiku 1 month ago

      My cousin couldn’t sell his Etobicoke house so he put it on the rental market for $3500 and potential renters have started a mini bidding war. Crazy times.

  • Lou 1 month ago

    Then you have BOC asking not to give raise because supply price and spending won’t reduce inflation… Isn’t it time to rethink the domestic wheel I m sorry maybe time to pass the buck to people instead of grants loans to industries at gov too? just letting BOC do their part isn’t going to cut it.

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