In the last wild year for Canada’s housing market, rock-bottom mortgage rates and higher household incomes led to a homebuying frenzy that sent home prices across the country soaring.
Now, the red-hot market that these conditions helped create has lifted prices to levels beyond what many can afford at a time when mortgage rates are beginning to rise again. According to a new report from the National Bank of Canada, this could be setting Canada’s housing market up for a period of cooling as buyer demand softens.
The bank’s national Housing Affordability Monitor, published earlier this month, found that housing affordability deteriorated in all 10 markets tracked by the report. This marked the first time in four quarters that affordability has deteriorated at the national level. The bank’s economists Kyle Dahms and Camille Baillargeon also noted that the first quarter deterioration was the sharpest measured in more than two years.
National Bank calculates housing affordability by looking at changes over time to the monthly mortgage payment on a median-priced home, assuming a 25-year amortization period and a five-year term.
What this means for the country’s housing market outlook is that buyer demand will likely cool as rising mortgage rates reduce purchasing power and soaring home prices outpace increases to household incomes.
Dahms and Baillargeon write that mortgage rates hit bottom in February and have been rising since then, reaching one-third of their pre-pandemic levels. The pair went on to flag the fact that the huge run-up in home prices means that it now will take homebuyers 63 months to build up a downpayment for what National Bank terms a “representative dwelling” in Canada. This downpayment figure is, of course, much higher in particularly expensive markets like Toronto, where it would take a mind-boggling 278 months to save for a representative home.
While cooling buyer demand should eventually lead to a slowdown in home price growth, Dahms and Baillargeon believe the national market still favours sellers to the point that a further deterioration of housing affordability is likely in the short term.
And though urban condo markets have been bastions of relative affordability recently, this may not be the case for much longer.
“All told, the worsening in affordability this quarter was specific to the non-condo segment. Indeed, the condo portion saw the rise in home prices offset by incomes which meant affordability remained unaffected for this segment of the market,” the economists wrote.
“That however, may not be true for long.”
