Canadian Real Estate Affordability Is Worsening As Household Incomes Fall: Desjardins

It’s not just Toronto or Vancouver real estate. Canadian home prices have risen so fast, they’re no longer affordable for Canadians in general. The Desjardins Affordability Index (DAI) shows housing became less affordable in Q3 2021. Falling incomes and rising home prices combined to create a national affordability crisis. The financial institution doesn’t see much price growth but expects affordability to worsen. The end of quantitative ease (QE) and rising rates will push carrying costs higher for homes. That is, if prices don’t fall after adjusting for normalized household credit capacities.

Housing Is Barely Affordable Anywhere Across Canada

Home prices across Canada are near the point where an average person is no longer able to buy an average home. The index fell to 104.4 in Q3 2021, down 3.0 points from the previous quarter. This is a new record low since 2006, which has averaged 121.8 points over the period. A deviation of 17.4 points is quite the gap. Oh wait, this probably makes almost no sense to anyone that doesn’t work at Desjardins, does it? Let’s unpack what this index does and what it means.  

The DAI is basically an inverse cost coverage score for residential real estate. That means a higher score shows improved housing affordability for the average household. If the index reads 100, the average after-tax income exactly covers home payments. Any higher and they have a little extra cash, lower than 100 they have less. Not all that complicated, but not an obvious way to construct an index. Now, let’s circle back to data.

Desjardins Affordability Index

Sources: Bank of Canada, Statistics Canada, Canadian Real Estate Association, Conference Board of Canada and Desjardins, Economic Studies. 

In this case, the average household makes just 4.4% more after-tax income to buy an average home. If the index falls more than 4.4 points, an average household can no longer afford a home across Canada. It hasn’t been this bad in the history of the index. This isn’t just Toronto or Vancouver either, which we’ll discuss later. This is the national level in one of the world’s least densely populated countries. Even small towns are seeing 50-60% home price growth, largely due to easy credit.

Desjardins attributes this to various factors, such as falling incomes and rising prices. At the national level, they see home prices hitting a plateau soon. Though they do see housing affordability worsening over the next few quarters. Quantitative ease and higher rates will drive financing costs higher. If home prices don’t fall with reduced credit capacities, mortgages become more expensive.

Toronto Real Estate Is 30% Less Affordable Than Usual

Toronto is the second least affordable market in Canada and hit a record low for the city. The city’s DAI fell to 75.5 in Q3 2021, a drop of 4.1 points from the previous quarter. Since 2006, the average has been 104.1, 29.6 points higher. We remember, that data means little to most people without a lot of effort, so let’s unpack it. 

An average household after-tax income can only carry 75.5% of the payments for an average home. On average, they need to make almost 25% more after-tax income to qualify for a mortgage. The long-term average showed households had a 4.1% surplus of income to pay for housing. People in Toronto are either very underpaid or housing is very overpriced.

Vancouver Real Estate Is The Least Affordable In Canada

Vancouver has never been less affordable and took the crown for the worst market in Canada. The index fell to 72.9 in Q3 2021, down 1.5 points from the previous quarter. Since 2006, the average for the market is 75.5, so affordability is only 2.6 points worse than the long-term trend. Vancouver has always been unaffordable, it’s just exceptionally unaffordable right now.  

In human-readable terms, an average Vancouver household hasn’t been able to afford an average home for a while. After-tax incomes are 27.1% lower than needed on average in Q3 2021. Since 2006, it’s been an average of 24.5% lower than needed. It’s been a really long-time since Vancouver was affordable and it’s getting worse.

Montreal Real Estate Is Still Affordable But Deteriorating Fast

Montreal hit a low for affordability but it’s better than Toronto or Vancouver. The index fell to 115.5 in Q3 2021, down 3.7 points from the previous quarter. Since 2006, the average index score has been 128.4 — 13 points higher. Affordability deteriorated by a lot and it’s getting worse.

The finance to human translation means incomes can carry costs 15.5% higher before maxing out. It’s been 28.4% on average since 2006, much higher. People in Montreal can still afford to buy a home at these levels but housing sucked up a lot of cash. The cash put towards housing means a lot of money diverted from other areas of the economy.

All of Canada is in a tight spot for housing affordability and it’s highly unusual. Since 2006, the average household has had 21.8% more disposable income after paying a mortgage. Now just a 5 point rise in carrying costs would make the country unaffordable on average. 

Households can still pay these prices but they come at the cost of diverting resources. Rather than spending at restaurants and shopping locally, more cash goes to shelter. This dampens livability and employment, while regions become even more vulnerable to shock.

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  • Saul 2 years ago

    Get the foreign non resident buyer out of the Canadian real estate market. And watch prices stabilize.
    These people and corporationswith unlimited $ use Canadian real estate as a bank account. They NEED to park their money somewhere with the best returns.
    Canadian real estate 🏡 🏢🏨🏬🏬 shows the best returns.

    • D 2 years ago

      It’s a given but most politicians here are rotten crooks and they profit from this as well. Politicians, banking/fin executives, real estate pros want this so we must have it.

  • Kate 2 years ago

    Who cares? The most important factor that the price is up and up.

    • Mortgage Guy 2 years ago

      These reads might be a little too complicated for you. The bank is literally saying prices are not going up just like Ontario’s forecast today.

    • D 2 years ago

      When will you say no then? When the average Canadian home costs $5 million? Is that what you want? I believe that rising home prices will crash this economy anyway.

      • Alex 2 years ago

        It is very likely that the inevitable crash will occur during a moment of extreme exuberance; typically why most people don’t see them coming.

        The reason why the BoC was so quick to end QE, despite showing lower inflation numbers than our southern neighbours, is because our real estate market has gone full on bonkers, and all rationality has exited the stratosphere.

        At these price levels, it would be hard to see real estate maintain current valuations without a constant influx of cheap capital, and with rate hikes around the corner + mortgage rates burgeoning upwards, it will be interesting to see what happens.

        • Kaliucla 2 years ago

          Don’t worry, the riskiest mortgages are insured by the taxpayers so the banks will be OK.

  • Nassim 2 years ago

    Now what percent of people that want to buy a home are earning above average, considering the average Canadian is 50 and later in their career?

  • Mark Bayly 2 years ago

    People in Canada don’t care about debt They have the view of the liberal party on this issue Realistically if consumers go bankrupt so what A few years later credit card companies will be lining up to offer them easy credit You would have to be mentally deficient to think this can go on forever

  • Tamara Pruyn 2 years ago

    I speak to clients every day whose income is 50-80% less than mine, but they bought a house 10+ years ago. I could never afford a home in Canada the way things stand – obviously I’m not alone. I do wonder a lot about prices simply continuing up and up because of the artificial boosts from govt. I’m wondering who will afford these homes and realize we are more and more on our way to a feudal type of system. I think many people blaming only foreign buyers are forgetting domestic multi property owners are also a huge problem.

  • ZR 2 years ago

    I am not so sure that foreign money is driving up house prices. I personally know people that own 3 to 5 houses or 3 houses and 2 condos (in any case multiple dwellings) and no foreign money is involved at all. I do believe that cheap money has contributed to prices being this high or unreasonable. Of course, some statistics on this (i.e. the number of foreigners buying real estate would help and I believe there are already at least some statistics out there for the last couple of years or so) would help have a better picture of this.

    • Derek 2 years ago

      Yes, I agree. Easy access to cheap money and interest rates at record lows for decades have helped to cause this. It’s also caused people to own more than one property and others will argue that this helps the rental pool but obviously it hasn’t and doesn’t. If people want to be ‘investment’ experts then do it without government effectively subsidizing it through extremely low interest rates and easy loan approvals and huge debt loads backed by again the government and no taxes on capital gains. Canada needs to promote an environment for investment in business and innovation. Not non productive housing stock.

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