Canada’s Real Estate Bubble Is So Big Households Need 64% of Income For A Mortgage

Most of Canada couldn’t buy a home even if they wanted to. National Bank of Canada (NBF) is once again sounding the alarm on housing affordability. A typical home required nearly two-thirds of a household’s income just to service the mortgage payments in Q2 2022. The quarter saw the fastest erosion of affordability in 40 years, but the bank doesn’t see it lasting long. Rising rates and falling sales are forecast to trigger double-digit price declines in the not-so-distant future. 

Canadian housing affordability eroded for the sixth consecutive quarter. Households needed to dedicate 63.9% of their income for a typical urban home in Q2 2022. The 10.4 point increase from the previous quarter was the largest seen since 1982. Yes, it’s been over 40 years since anything like this has happened.

Rising Mortgage Rates and High Prices Are Behind The Decline In Affordability

Does 1982 sound familiar? That’s because it was the last time an inflation and housing crisis forced massive rate hikes to cool buying. It also preceded a home price correction that restored market affordability with the higher rates. 

Mortgage rates are the primary driver in this case as well. The bank’s benchmark rate for calculating affordability surged 123 bps in Q2, an increase that hasn’t been seen since 1994. Demand stimulus from low rates is now being reversed, slowing existing-home sales back to 2019-levels. 

Rates only began rising at the end of Q1 and made most of the climb during Q2. They really only had time to drive costs higher, without (yet) reducing prices. 

Compounding the issue is rising home prices in the second quarter. Prices have been falling in key cities like Toronto recently, but that wasn’t the case for most of the country on a quarterly basis. Higher financing costs and rising prices predictably accelerated the erosion of affordability. 

National Bank Expects Falling Home Prices Will Improve Affordability

The news wasn’t all bad. NBF sees the normalization of home sales as a sign prices will fall in the not-so-distant future. Most likely a welcome change after the destabilizing gains seen over the past two years. 

The bank wrote, “… we are noticing a considerable slowdown in the resale market, with home sales now 12.8% below their 10-year average. This downswing should translate into lower home prices in the months ahead with our current forecast calling for a 10% decline.” 

The decline is one of the smaller forecast downturns, but they also use a different index compared to the central bank. In contrast, Oxford Economics is calling a 24% drop for home prices, while BMO sees a similar-sized price decline in the coming months.

“This development, combined with the stabilization of the benchmark 5-year mortgage rate should improve affordability before the year-end,” said the bank. 

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