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 AffordabilityThe 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 AffordabilityThe 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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