Canadian real estate has been slipping in terms of affordability, but it turns out it’s not the worst it’s ever been. National Bank of Canada (NBC) economists crunched the numbers on mortgage payments throughout history. They do warn that this market is the least affordable since the early 1990s real estate bubble. However, home prices have seen peaks of unaffordability higher than the current levels.
About The Calculations
NBC economists use the median income, the median cost of a home, and mortgage with a 25 year amortization, at a 5-year term. They then calculate what percentage of gross income would be required to service these mortgages. As a general guideline, shelter is considered affordable when you’re devoting less than 30% of your gross household income towards total payments. It’s worth noting here that the median household has never been able to get the median cost of a house lower than 30% across the general country.
The percent of income the median family would have to devote to servicing a mortgage on a median home. Conventional mortgage, at a 25 year amortization, using a 5 year fixed. Source: National Bank of Canada.
Canadian Real Estate
The median family is having the worst time with affordability in just under a decade across Canada. At the end of the third quarter in 2017, the median family would consume 47.17% of their income servicing a mortgage on a median home. The last time it was this high was in the first quarter of 2008. This is 51.24% lower than the all-time high in the third quarter of 1981. The peak was a massive 71.34%. Affordability is worsening across the country, but it’s definitely not the worst it’s ever been.
Toronto Real Estate
Toronto had a very quick run over the past year, so it’s no surprise incomes didn’t keep up. It would currently take 71.76% of the median family income, to service a mortgage on a median home. This is the highest level seen since the fourth quarter of 1990. It’s still 14.41% lower than the all-time high achieved in the second quarter of 1990.
Vancouver Real Estate
Vancouver has always been one of the most expensive places for homeownership in Canada, but we’re not quite at a high for unaffordability. Currently it would take 79.87% of a median family income to service a mortgage on a median home. This is the highest it’s been since the second quarter of 1990. We’re currently 18.2% lower than the all-time high of 97.64%, achieved in the third quarter of 1981. Surprisingly, Vancouver has been less affordable.
Montreal Real Estate
Despite claims of Montreal prices “soaring,” the city is pretty close to the most affordable it’s ever been. Currently the median family would need 28.79% of their income to service a mortgage on the median home. This is the highest it’s been since the first quarter of 2016. We’re 44.8% lower than the all time high of 52.16%, which was achieved in the third quarter of 1981. Homeownership affordability has been substantially worse historically.
Looking at the chart there’s one other thing that’s fairly obvious to most economics nerds, recessions. The early 1980s, early 1990s, and 2006 peaks were all followed by significant recessions in Canada. This typically results from the higher levels of debt servicing, which reduces the amount of spending across the general economy. At our current levels of unaffordability, it would be nothing short of a miracle to avoid a recession here.
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