Canadian Real Estate Prices Unlikely to See Drastic Price Growth From Here: Desjardins

Canadian home prices are going to have a difficult time moving higher from here. Desjardins, the country’s largest cooperative financial group, updated its affordability index for Q1 2021. At the national level, the index plunged to the worst level of affordability in over a decade. Their model indicates a substantial price increase would be difficult from here.

Desjardins Affordability Index (DAI)

The Desjardins affordability index (DAI) compares incomes, mortgage payments, and home prices. Ultimately it looks at a borrower’s ability to pay for a typical home. It’s similar to other affordability indexes, like the ones published by NBC and RBC.

Reading the DAI is straightforward, but it’s inverse to what you’re probably used to seeing. As the index rises, housing affordability improves. When it falls, housing affordability decreases. If the index falls below average, the market is no longer considered affordable. The model notes state, this means the market is unlikely to sustain a drastic new price increase.

Canadian Home Affordability Drops To The Lowest Level Since Before The Great Recession

Canadian housing affordability made a sharp decline last quarter, right across the country. The index fell to 102.4 in Q1 2021, down 11.2% from the previous quarter. The average at the national level is 122.4, so the market is 16.34% lower than typical. Affordability is now the worst its been since 2008, before the Great Recession.

Canadian Home Buying Affordability

The Desjardins index of home affordability, compared to the historic average. Higher numbers mean more affordable.
Source: Desjardins; Better Dwelling.

Right, but who could have seen the current increase in home prices during the pandemic? This model appears to have captured that forecast. In Q2 2020, the drop in mortgage rates and increase in disposable income, caused the index to surge higher. It cleared the average affordability level. Home prices were considered affordable in the quarter and had room to rise. They did. Prices have now increased so much, they absorbed the cheap money, and then some.

Toronto Real Estate Unlikely To See A Big Jump In Prices From Here

Toronto real estate’s affordability has always been somewhat difficult for locals. Still, the index tumbled to a new record low last quarter. The index fell to 78.0 in Q1 2021, down 6.7% from the previous quarter. Affordability is now down 25.9% lower than average. Toronto is the second least affordable market in Canada.

Canadian Home Buying Affordability

The percent difference between the current level of affordability, and the long term-average. The lower the number, the worse the affordability compared to average.
Source: Desjardins; Better Dwelling.

Vancouver Real Estate Is The Lease Affordable In Canada

Vancouver real estate retains its title as the country’s least affordable market. The index fell to 71.7 in Q1 2021, down 4.5% from the previous quarter. Affordability is now 4.9% below the average. It was just a few bps below the average at the end of last year. That may indicate the region has room to run. At least a little more than Toronto.

Montreal Real Estate Is Still Affordable

Montreal real estate remains affordable but did see further deterioration. The index fell to 126.8 in Q1 2021, down 1.2% from the previous quarter. Last quarter was only 1.63% lower than the long-term average. Is it expensive and fast-moving, or still an affordable market? Both, kind of.

Montreal is affordable in contrast to the rest of Canada. It’s more expensive than people in the region typically devote to housing costs. If the region moves towards levels seen in Toronto and Vancouver, there’s going to be a big adjustment. The additional money spent on housing would come from spending in other areas of the economy. Sacrificing your economy to inflate housing is generally a bad idea. 

Hamilton Real Estate Is Almost As Unaffordable As Toronto 

Hamilton real estate is nearly as unaffordable as Toronto, and it became that way in just a few years. The index fell to 85.8 in Q1 2021, down 6.7% from the previous quarter. Affordability is now 31.5% below the average for the region. The IMF estimates the market is nearly 40% overvalued. That means the local economy is now extremely vulnerable to shock.

Niagara Real Estate Now One of The Least Affordable Markets In Canada

St Catharines-Niagara real estate is experiencing an unprecedented lack of affordability as well. The index reached 81.6 in Q1 2021, down 14.0% from the previous quarter. Affordability is now 38.6% lower than the long-term average. By this measure, the region is less affordable than Toronto last quarter. Quite the distinction for a region where a casino produces around 9% of GDP.

Homebuyer affordability is set to further deteriorate in the coming quarters. Even if home prices stay at this level, rate normalization will lower affordability. Rate hikes may be a few years away, but the end of QE is expected this year. Lower financing affordability also tends to be a weight on further home price growth.

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  • HFX Realtor 3 years ago

    Try talking to my neighbor. He thinks our homes are going to rise 25% every year from now on.

    • Mortgage Guy 3 years ago

      Isn’t this the truth? A once in a lifetime injection of capital to bail out the banks and investors, and everyone thinks this is going to happen every year.

      Just buy a condo. It’s going to be financial freedom forever. You don’t even need to rent it to someone, because they won’t pay the full carrying costs anyway.

      • Axel McLion 3 years ago

        “once in a lifetime injection of capital” — Many people think that the amount of injected capital is going to continue growing. It’s basically either that, or we allow a deep recession to occur. They haven’t allowed a deep recession for 20+ years so why allow it now? Printing money, even if it leads to very high real inflation and eventually destruction of the currency and country, seems like the easiest path in the short term.

        I’m still holding out for a recession which will cause real estate values to crash, but am losing faith….

        • Doomcouver 3 years ago

          You have too much faith in the government to avert a recession. Too much stimulus is going to break the “hidden inflation” dynamic that’s been allowing central banks to leave rates so low up until now. The federal reserve will raise rates, and the USA may be able to sidestep recession, but Canada won’t be so lucky this time. This is like the mirror image of what happened in 2008.

          • Sam 3 years ago

            The government, BOC and other decision making intellectuals either believe unabashedly in MMT or some other “woke” derivative thereof. They believe they are enlightened and empowered and able to side-step the lessons of history.

            It will work for awhile as they apply QE, MMT money printing, market manipulation methods…whatever their “woke”, “enlightened” and arrogant ideas can contrive to usher in a new world economy…..

            It really just amounts to buttressing the levee with band-aids as it keeps raining and filling…..except when it finally breaks it won’t be the super-rich entitled enlightened people who suffer, just all the middle class hard workers who were forced into ultra high debt-loads just to live a decent life.

            This sucks…and I wish there was another political option to support. A government that believes in good old fashioned economic principles that support a sustainable middle class……

          • Ryan Frouws 3 years ago

            I doubt the FED can raise interest rates without imploding the bond markets which is what is funding the government.

      • Doomcouver 3 years ago

        I think believing in unicorns would be more realistic. What exactly do these people think the price drivers of real estate are? Greedy house-hoarders are going to drive Canada’s economy right off a cliff.

  • Trader Jim 3 years ago

    We’ve entered bizarro world, where everyone is hoping for further lockdowns because the easy conditions push asset values higher.

    I don’t know about prices falling, but another few hundred billion from the government to send prices higher would require Canada completely rolling back and only impacting lower-income households. It’s not doing a great job with the pandemic, but it’s not that bad.

    • Doomcouver 3 years ago

      Canada’s real estate market has been in a bizarro world for well over a decade now.

  • Kolf 3 years ago

    Hmmmm this means Montreal and Ottawa still have room to grown among major cities.

  • JB 3 years ago

    CMHC doesn’t insure over a million dollars so the banks and other private insurers have to assume risk. So i think there is a natural cap coming soon. Hope that CMHC cap does not increase that cap.

  • G P 3 years ago

    Well I have news for you, Evan’s gone

  • Bubba Gump 3 years ago

    There’s a reason Toronto is not a good investment. Too cold and too socialist. Smart money is fleeing.

  • Carlos Santiago 3 years ago

    This article makes me laugh. You can’t stop Canadian housing. It is a JUGGERNAUT. Prices will rise more than ever in the coming year.

    • Charles Ponzi 3 years ago

      I hope my house continues to rise over $200k per year. Then I can fire all of my employees, and live the life of luxury.

      It’s fine though because they don’t need jobs either. They can just use their homes to pay their bills.

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