In Canada’s heated housing market where have prices continued to soar, affordability dropped at the quickest rate in well over two decades during 2021.
This week, the National Bank of Canada (NBC) published its Housing Affordability Monitor, which shows that housing affordability worsened at the fastest pace in more than 26 years over the past year. In Q4-2021, affordability weakened as the mortgage payment on a representative home as a percentage of income (MPPI) rose 2.1 points, up from Q3-2021’s increase of 1.7 points. This marks a fourth consecutive quarter of deterioration.
It would now take 48.6 per cent of the income from a representative household to service the mortgage on a representative home in Canada. This is elevated compared to the last cyclical high reported in Q4-2018, and the worst affordability since the mid-1990s, according to NBC. Toronto, Hamilton, Ottawa and Halifax have been “showing levels not seen since the start of this century.”
Between the ten Canadian markets the bank analyzed in Q4-2021, affordability declined in all of them, the worst three cities being Victoria, Toronto and Hamilton. By property type, deterioration was worse for non-condo homes nationwide, which worsened by 2.7 points versus 1.1 points for condos.
Mortgage payments eating up more household income
In Canada’s major cities, mortgage payments continued to account for a larger percentage of a household’s income.
In Toronto, the overall MPPI increased 3.6pp in Q4-2021 to 67.3 per cent, its highest level since 1990. By property type, the MPPI for a non-condo home increased four per cent quarterly to 72.4 per cent, and rose 1.7 per cent over the same period to 40 per cent for condos.
To buy a non-condo home in Toronto, it would now take 340 months (28 years) to save for a down payment at a savings rate of 10 per cent. An annual household income of $212,013 is needed to afford the representative non-condo home, which is worth $1,234,597. Toronto condos took significantly less time and savings to afford, requiring 59 months of saving (almost five years) and a yearly household income of $137,145 to purchase the representative condo price of $682,111.
In Vancouver, the length of time needed to save for a home was even longer compared to Toronto. If you’re looking to buy a non-condo home, you’d need to save for 431 months (almost 36 years) for a downpayment and have an annual income of $269,994 to afford the representative price of $1,572,237. This is the highest number of months needed for saving a downpayment compared to the other nine cities NBC analyzed.
Vancouver condos require 59 months of saving (4.9 years) and $137,442 of annual income to afford the representative condo price, worth $683,650. The MPPI of a non-condo Vancouver home is now 91.9 per cent, up 2.8 per cent quarterly. The MPPI for condos rose 1.2 per cent quarter-to-quarter to 39.9 per cent.
Victoria reported the highest increases to its MPPI for condo and non-condo homes last quarter, which rose 2.5 per cent and four per cent quarterly to 40 per cent and 76.2 per cent.
If you were to purchase a non-condo home in Victoria, you’d need an annual take home of $189,846 and to save 358 months (29.8 years) for a down payment to afford the representative home of $1,105,517. By saving for 53 months (4.4 years) with an annual income of $117,551, you could afford a Victoria condo, worth $580,689.
Rising mortgage rates contribute to declining affordability in Q4-2021
NBC noted in its report that increasing mortgage interest rates were the larger driving force behind declining affordability last quarter in addition to home price growth.
The bank’s five-year benchmark mortgage rate, which is used for its affordability metrics, increased 28 basis points (bps) in Q4-2021, the largest quarterly change since Q3-2017, when the Bank of Canada upped the overnight rate two times during the same quarter.
“With investors now anticipating a more rapid increase in policy rates, our benchmark rate has increased by another 30bps in the current quarter for a cumulative 100bps since the 2020Q4 rate trough,” explained the report. “All else being equal, such an increase would have translated into a 10.7 per cent decline in purchasing power.”
In the second half of 2021, a record-high portion (53 per cent) of homebuyers opted for variable rate mortgages instead of the standard five-year fixed mortgage. In doing so, NBC said that mortgage holders boosted their purchasing power by 10 per cent in Q4-2021, but this “escape route,” is expected to close as the BoC starts to up its policy rate.
