For the first time since the mid-1990s, Canadians will need to spend over more than half of their household income on a mortgage for the average home.
In its latest Housing Affordability Monitor report, the National Bank of Canada (NBC) stated that housing affordability in the country worsened for the fifth consecutive quarter. The mortgage payment on a representative home as a percentage of income (MPPI) rose 4.9 points in Q1-2022, up from the 2.2-point increase recorded during the previous quarter. This marks the worst quarterly deterioration in more than 27 years.
Between the ten major markets analyzed in NBC’s report, affordability declined in all of them, particularly Victoria, Toronto and Vancouver.
“Over the last 12 months, the worsening in affordability was the nastiest in 40 years,” said the report. “For the first time since 1994, it would take more than 50 per cent of income for a representative household to service the mortgage on a representative home in Canada’s main urban centres.”
Growing home prices and higher borrowing rates were cited as the two main causes behind Canada’s crumbling housing affordability in Q1-2022. For instance, NBC’s five-year benchmark mortgage rate used in its affordability metrics increased 46 bps in Q4-2021, the largest one-quarter change since Q3-2013.
According to NBC’s economists, most homebuyers have been able to avoid steep increases in recent months by opting for variable rate mortgages, but financing conditions for these mortgages are becoming less attractive. As a result, this is making an impact on the resale market.
“Headwinds will continue to blow against Canada’s real estate market in the months ahead with the Bank of Canada pursuing its monetary policy normalization process through higher policy rates and quantitative tightening,” said the report.
Affordability declines hit Canada’s largest cities the hardest
Canada’s largest and most expensive cities faced the harshest declines to their affordability in Q1-2022.
For the third quarter in a row, Victoria registered the largest annual deterioration to its MPPI, which increased 19.6 pp. As a result, Victoria’s MPPI hit 80 per cent, the highest level for the city since Q2-2008. On a quarterly basis, the MPPI in Victoria increased 8.5 pp. For non-condos and condos, the MPPI climbed to 85.7 per cent and 44.2 per cent, up 9.3 per cent and 4.1 per cent quarter-over-quarter.
Now, the annual household income needed to afford the representative Victoria home is $204,078 for a non-condo and $123,747 for a condo. It would take 382 months (31.8 years) at a savings rate of 10 per cent to acquire enough funds for a downpayment on a non-condo home, and 58 months (4.8 years) for a condo.
In the same province, Vancouver faced strong affordability deterioration as the MPPI grew seven pp during Q1-2022, an acceleration that hasn’t been on record since 1994. Vancouver remains Canada’s least affordable city to buy a home in, with the representative mortgage payment now accounting for 81.4 per cent of the median income. For non-condos, the Vancouver MPPI increased nine per cent quarterly to 101.5 per cent and climbed 3.2 per cent to 43.4 per cent for condos.
In British Columbia’s largest city, you’ll need an annual take home of $285,078 to afford a non-condo home, and at least $142,357 a year to pay for a condo. If you’re planning to put together a downpayment, it would take about 452 months (37.6 years) and 63 months (5.25 years) of savings at a 10 per cent rate to afford a non-condo and condo dwelling.
Over in Toronto, the situation doesn’t improve much.
In Q1-2022, the city reported the highest quarterly deterioration in affordability since 1994 as the MPPI grew 8.1 pp to its highest level since 1990. The MPPI for non-condos increased 8.9 per cent quarterly to 81.5 per cent while the same measurement rose 4.2 per cent for condos to a MPPI of 44.2 per cent.
Toronto homebuyers need an annual income of $228,100 to afford the representative non-condo home, much higher than the $144,644 in funds required for a condo. At a 10 per cent savings rate, it would take about 363 months (30.2 years) to put together enough of a down payment for a non-condo home and 64 months (5.3 years) for a condo in the city.
