The BoC Still Thinks Canadian Real Estate Is More Affordable Today Than In 2008

Unaffordable real estate? The Government has no idea what you’re talking about. The Bank of Canada (BoC) Housing Affordability Index (HAI) shows affordability improved since 2008. Despite the hard to believe reading, it provides an interesting warning. Affordability of real estate is deteriorating with minor rate hikes, compared to 2008.

Housing Affordability Index

The BoC’s Housing Affordability Index (HAI) is the ratio of income used to pay for a home. The amount of disposable income households make, are divided into quarters. The ratio is the percent of that income that goes towards paying a mortgage and utilities. Costs exclude things like taxes and insurance, so the cost of a home is usually higher. It’s not perfect, but it’s what your central bank uses. They’re in charge of the money supply, so it’s probably worth checking out their work.

Canadians Spend Over 35% of Their Income On Housing Costs

Housing affordability is on the decline, but it’s nowhere near the high. The end of Q1 2018 reached 35.4%, up 1.72% from the year before. That’s not Toronto or Vancouver… it’s across the country. We’re nowhere near the 2008 peak of 39.2%, or even close to the pre-historic 1990s or 1980s peaks of 53% and 62.9% respectively. At first glance, it’s a little confusing to think of housing as “cheap,” even for real estate agents. If we look back, we see that as early as 2014, the BoC said Canadian real estate is 30% overvalued. How can it be more “affordable,” and does that mean there’s less risk?

Bank of Canada Housing Affordability Index

The percent of income used to service mortgages across Canada. This number includes mortgage payments, and utilitilies.

Source: Bank of Canada, Better Dwelling.

The Difference Between Then and Now

There are some important differences for Canadian real estate between 2008 and today. Affordability slipped starting in 2005 with rapidly rising interest rates. The rates climbed to prevent the market from overheating, and improve affordability. Interest rates increased around 2 points, making existing debt more unaffordable as well. The cost of carrying real estate debt became steep, since you were paying more in interest. Affordability “improved” as the overnight rate was cut to historic lows soon afterwards.

Bank of Canada Target Interest Rate

Average monthly target interest rate maintaned by the Bank of Canada.

Source: Bank of Canada, Better Dwelling.
Today, interest rates are substantially lower, but the principal is higher. So high, the BoC now considers debt levels a risk to interest rates. When Canada normalizes rates, affordability will deteriorate very quickly. That doesn’t mean prices will rise, but the cost of owning a home will.

Remember, they raised the overnight target rate 2 points from 2005 to 2008. They then slashed 4% to improve affordability during the Great Recession. The current overnight rate isn’t even at 2 points, and even if it was raised 2 point, we still wouldn’t have 4 points to cut. The size of household debt creates a more complex problem than just a ratio of income to mortgages.

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  • C 6 years ago

    It is comments like this from the BoC that keep residents believing everything’s OK.

    How irresponsible to compare affordability when interest rates are so low, they barely affect peoples monthly mortgage payments.

    I would like a statement from the BoC comparing affordability based on comparable interest rates.

    And, I would like them to raise interest rates to where they should be. We have been told time and time again that our economy and jobs are doing better than ever before, and yet we are still looking at recession level interest rates???

    Something is definitely wrong with a central bank that compares payments during a recession with high interest rate, to an economic boom with the lowest interest rates in modern times.


  • CS 6 years ago

    People keep thinking that the rate will rise to 5%, 10% or even 15%.
    Maybe the low rate is the new norm.
    Remember the biggest borrower in the world is the government. Why would you raise the rate just to screw yourself? By looking at the historical chart, the rate fluctuates over the years but overall it is trending down. And the new peak never reaches the previous “norm”.
    The interest rate is a tool to “manipulate” the economy. The only reason BoC wants to raise rate so desperately is to prepare the next crisis so they can make it even lower. And you know what happens after 0% rate? it is called QE. Japan has done it. US has done it, EU has done it and China has done it. What make anyone think Canada is any different.

    • Grizzly Gus 6 years ago

      QE is different than NIRP or ZIRP.

      Don’t think prime would even have to get to 5% before the shit show starts. A lot of idiots out there already have mortgage rates above 10% who assume they will be able to refi with a normal lender for less………. good luck to them

      Question, why did the US FED decide to raise rates back in 2006? How come even after they slashed them down to almost zero did it take until 2012 before it hit bottom?

      How come when the early 90s bubble blew up here and we immediately slashed rates by 200+ bps did prices continue to fall until about 96?

      Rates have been trending down cycle to cycle since the 80s, that is true. But if you go back further you can see that the opposite was true for the 20s years prior (late 1950s-1980)

      Could this be the start of an upwards trend? Lets hope not

  • SUMSKILLZ 6 years ago

    As a regular Joe, I find these figures quite meaningless. Today’s take home pay vs cost of housing, property tax, insurance, gas, power, food, clothing, etc. is in a sorry state compared to way back when. Inflation figures are a joke.

    Economists never seem concerned with the full picture of the cost of living. Things were bad even before interest rates hit rock bottom. Daycare costs alone are like a mortgage payment. Car insurance approaches what a family vacation can be. My bland food bill is almost $1000 a month.

    Why are folks only talking about the squeeze on housing costs? Trippling interest rates would add up to less added cost per month than all the squeezes I’ve felt in the last 10 years on all the other budget lines in my monthly tally.

  • SCE 6 years ago

    The only ppl who think otherwise is Griz Gus, Blue and everyone on this site. I guess everyone here knows more than the BOC!

    • Grizzly Gus 6 years ago

      Yikes! That is your take away from this? Really hope you aren’t (or too many other people with your intelligence aren’t) one of the genius investors holding multiple properties or we could be in for some serious hurt.

      Did you click on the link above about the BOC saying prices 30% overvalued as of 2014? Probably not.

      Have you ever heard of the IMF or BIS who have been sounding the alarm on Canadian housing for a few years now? Probably not.

      Did you realize that the above numbers are averaged out across all of Canada? Probably not.

      August of 2017 Ratehub did a study that determined GTA and VAN were both over 70%………

      If your investments are located in Saint John NB you’re probably in fine shape. If you hold in GTA or GVA I recommend that you take out a bit more HELOC debt (assuming you have borrowing capacity left), then take the wife and or kids away for one last nice vacation before bankruptcy and having to move back into your parents basement.

    • Bluetheimpala 6 years ago

      Think about what the BoC is trying to communicate in terms of their position on housing as a driver of rate policy. When my 4 year old tells me he ‘neeeeeds’ some Nexo Knight I tell him ‘You have some Nexo Knights already, this isn’t my priority right now, eat a bannana’. We’ve had homeowners screaming ‘we neeeeed relief’ and the BoC quietly said housing is not a direct driver of the policy because in their view it is priced properly. Debt is another issue but we’re in a corporate debt bubble, which is a much bigger problem than a bunch of people getting rich on the backs of others. Companies hire us and pay us money which I know is hard to grasp for many. It is better to force restructuring (or really more sustainable business practices) on the healthy-ish companies and then have these same companies gobble up the slack vs prolonging our binge and then even healthy companies may go so far down the ‘debt rabbit hole’ they can’t get out which means layoffs. Plus there is our dollar to factor in. Buffer for when times get tough. More rate increases until we’re normalized. There will be blood. There always is. BD4L.

    • bob 6 years ago


      terrible argument. but lets play your game on the opposite side of the spectrum.

      the only people that think otherwise are SCE. I guess he and everyone bullish on housing knows better than the cmhc.

      You do know this was posted 2 days ago lol.

  • James Wolfe 6 years ago

    Idiots indeed…sad really…all you hear from governments and the banks, one and the same are lies, spin and more lies…decades of it now…this will NOT end well….get out of debt and fast…

    Now the real question is, when will interest rates really start to rise?

  • bb 6 years ago

    These measures of affordability are problematic for being based on debt-based purchases and based on short-term interest rates. A better measure of affordability would (1) include some aspect of prices since buyers may choose to purchase their homes with savings rather than only finance it, and (2) would include interest rates likely to be faced over 25 years since Canadians have to re-finance every 5 years for their fixed mortgages. If we used a more conservative approach to affordability assessment, these trends would look different.

  • Justin Thyme 6 years ago

    Why on the one hand does government insist that banks use a stress test of higher rates to determine ‘ability to pay’ , but does not mandate the BoC to use the same stress test when determining ‘affordability’?

    Seems to me that if the BoC stress-tested the mortgages, they would come to a very different picture on ‘affordability’.

  • WestCoast 6 years ago

    Sure prices are all fine and dandy, but where’s the money coming from next go around. Mom and Dad are tapped now too-

  • @xelan_gta 6 years ago

    This article is very misleading.
    What BoC is calculating is payment affordability for all existing mortgage holders.
    This is completely different from affordability for new buyers.

    When market is pretty stable those two metrics are pretty close, but in our case those are different as day and night when affordability for new buyers is almost twice as worse as for existing homeowners.

    To sum it up BoC says that average affordability between all mortgage holders which purchased their properties as early as up 25 years ago is OK and that’s true, but this metric is useless if you are a first-time buyer. At the same time BoC doesn’t care about first time buyers, it cares about the whole economy therefore it’s using right metrics for their analysis.

    For current affordability for new buyers something like MPPI from National Bank should be used:

    BD could do a better job here on clarifying those aspects.

    • Marco 6 years ago

      No it’s not, you just want it to support your bearish narrative.

      > “Affordability “improved” as the overnight rate was cut to historic lows soon afterwards.”

      That’s a reference to existing debt holders getting relief, which was a gift to homeowners from the government. They devalued existing debt, lowering risk for buyers on renewal.

      > The size of household debt creates a more complex problem than just a ratio of income to mortgages.

      That means they can’t do it this time. Although they’ll probably use QE this time to provide relief, but you can’t just slip QE in and expect people to understand artificially induced stagflation.

  • Dana 6 years ago

    I wonder if BoC took the income from those NINJA mortgage application LMAO

  • Justin Thyme 6 years ago


    Please WARN US when you are going to do that!!!!!

    I just realized that the time line between the graphs is not the same! Even though the curves tend to match up!!

    The timeline of the first graph is 1980 to 2018

    the second is from 2000 to 2018.

    A fractal?

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