Housing affordability in Canada reached its worst level in 41 years in the second quarter, shortly after home prices peaked and as interest rates started to rise.

That’s according to National Bank of Canada’s latest Housing Affordability Monitor, which recorded its sixth consecutive quarterly decline in housing affordability.

But with home prices down significantly in certain markets, and a stabilizing of fixed mortgage rate increases, affordability should begin to improve, the report’s authors noted.

“We are noticing a considerable slowdown on the resale market, with home sales now 12.8% below their 10-year average,” the report reads, adding that’s translating into a decline in home prices. “This development, combined with a stabilization of the benchmark 5-year mortgage rate, should improve affordability before the year-end.”

Rising rates to blame for the latest deterioration in affordability

While rapidly rising home prices were largely responsible for the deterioration in housing affordability over the past year, an increase in mortgage rates was the key factor in the second quarter.

NBC noted that the 5-year benchmark rate used to calculate its affordability metrics rose 123 basis points in Q2, the largest quarterly change since 1994.

“This increase has propelled the benchmark mortgage rate to its highest level since 2011,” the report noted.

“To give an idea of scale, a 123-bps increase represents a surge of 14.4% for mortgage payments on the national composite, or an extra $500 a month, assuming no change in house prices.”

At that level, it now takes an average 63.9% of income from a representative household to service a mortgage in Canada’s main urban centres, the report found. That’s up over 10 percentage points from the first quarter and up 19.1 percentage points from a year ago.

The increases were most pronounced in the high-priced markets of Toronto and Vancouver, where mortgage servicing costs require 91% and 96.9%, respectively, of the median household income.

Mortgage payments as a percentage of household income have averaged 40.7% since 2000.

40% of Canadians are concerned they have too much debt

Borrowing costs have soared since the start of the year, with the Bank of Canada raising its overnight target rate by 225 basis points to 2.50%.

That has increased interest rates for variable-rate mortgage holders and those with lines of credit. Meanwhile, fixed mortgage rates have also rocketed higher, with average deep-discount rates rising from a low of 1.52% in March to approximately 4.50% today.

As a result, Canadians are looking more closely at their current debt loads, with more than 40% determining that they’ve got too much, according to new polling data from Angus Reid.

More than two in five Canadians (39%) worry that they have too much debt, the results show. Those most likely to be concerned about their current debt levels are those from Saskatchewan (57%) and Alberta (50%).

However, the majority, 58%, believe they have their debt levels under control. Provincially, those from Quebec are most likely to be confident about their debt levels (69%), followed by those in British Columbia at 60%.

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Last modified: October 5, 2022