First National Financial LP

Residential Mortgage Commentary - Affordability update

  • First National Financial LP

Sales are slowing, prices are falling, interest rates are rising and affordability is getting worse in the Canadian housing market.

The Bank of Canada’s latest Housing Affordability Index (HAI), for the first quarter of this year, shows households now have to dedicate 42.8% of disposable income to housing-related expenses.  That is up sharply from 39.7% in the fourth quarter of 2021 and 34.7% from a year ago.

The HAI is now at its highest level since the third quarter of 1991, which is seen as the height of the last real estate cycle.  Higher borrowing costs are cited as the key reason for the deterioration in affordability.

When calculating the Index, the BoC looks at so-called carrying costs, which include mortgage payments and utilities, compared to disposable, or after-tax, income.

One of the country’s big banks is echoing the BoC’s findings.  In its quarterly “Housing Affordability Monitor”, that is based strictly on mortgage carrying costs, the chartered bank puts housing costs at more than 50% of disposable income.  

Affordability is expected to erode further in the coming quarters, even as home prices continue to adjust to higher interest rates.  Optimistic forecasters are predicting that adjustment will happen fairly quickly and affordability will begin to improve by the end of this year.

Several of the country’s big financial institutions have issued reports down-grading their expectations for Canada’s real estate market.  Many see home prices dropping more than 20% from their pandemic peaks over the next year, or so.