Housing affordability in Canada hits worst level since last bubble: NBF

Real estate prices in Canada have become the least affordable in decades. A National bank of Canada (NBF) shows that affordability deteriorated in the fourth quarter of 2021. They found that this was the case for every quarter of last year, as low rates encouraged higher prices. As the overnight rate increases, housing affordability is expected to continue to erode temporarily. Historically, rising interest rates help improve affordability soon after.

Canadian homebuyers must spend half their income on a mortgage

A typical Canadian household must spend nearly half of its income on a mortgage to buy a home. A “typical” household needs to spend 48.6% of its income in Q4 2021 to service a mortgage. This is an increase of 2.1 points compared to the previous quarter and 7.8 points compared to the previous year. Remember, it’s not just about expensive cities like Toronto or Vancouver. This is a national index for big cities — it’s much worse in the most expensive cities.

Canada hasn’t been so unaffordable since the last bubble

Households have had to spend most of their income for decades on mortgages. The long-term average since 2000 is 40.2% of household income for a typical house. It was already high, but in the fourth quarter of 2021 it reached 8.2 points above the average. The revenue share is now the highest since the mid-1990s. For those unaware, this period took place immediately after the last housing crash in Canada.

Higher interest rates historically improve affordability shortly after adjustment

The similarities and differences between the environment are worth looking at. The last time Canadians spent so much income on mortgage servicing was right after the housing crash of the 1990s. Despite falling house prices, affordability briefly deteriorated as rates rose. Soon after, the country experienced record affordability and relatively strong productivity growth. Rising rates resulted in an immediate erosion of affordability for a few moments. However, affordable housing for generations has become the norm and GDP has improved as capital has been redirected from housing to other areas.

Today, Canadians face a similar situation. Historically, higher rates without stimulus slow house price growth and encourage the productive use of capital. This is supported by research from the Bank of Canada (BoC), as well as commercial banks. While higher rates will cause brief pain, in the long run it will create a healthier market. At least one major bank even considers that the more productive use of capital creates more inventory.

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