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A man calculating his home affordability

Housing affordability continued to deteriorate in the second half of 2022

Despite declining home prices, higher interest rates continued to erode housing affordability in the third quarter.

National Bank of Canada’s Housing Affordability Monitor deteriorated for its seventh consecutive quarter, making this the longest run of worsening affordability since the 11-quarter streak from 1986 to 1989.

“The magnitude of the deterioration, however, is much more pronounced this time (25.5 percentage points vs. 20.2 percentage points in the 1980s,” the report’s authors wrote. “As a result, the mortgage on a representative home in Canada now takes 67.3% of income to service, the most since 1981.”

In the higher-priced markets of Greater Vancouver and Toronto, mortgage servicing costs now require 102% and 93%, respectively, of the median household income.

While declining home prices are mitigating the erosion in affordability, the 75-bps worth of Bank of Canada rate hikes delivered in the quarter sent the benchmark mortgage rate to its highest level since 2010.

“To give an idea of the scale, all else being equal, a 75-bps increase represents an extra $300 (or an 8.1% increase) on the monthly mortgage payment for a representative home in Canada,” the report reads.

In its own report released last month, RBC called affordability “dreadful” as its aggregate affordability measure deteriorated by 14.5 percentage points over 2022 to a level of 62.7%.

It noted that a Vancouver-area buyer would need to earn at least $268,000 annually to qualify for the mortgage on a typical home, up from $200,000 a year earlier. That same buyer in Toronto would require a salary of at least $240,000, up 29% over the year.

Ben Rabidoux of Edge Realty Analytics estimates the average monthly payment needed to carry a mortgage on a typical home is now $3,300, up 43% compared to a year ago.

“Until this changes, it’s hard to envision demand returning to anywhere close to early 2022 levels,” he noted in a note to clients.

Declining affordability happening worldwide

Canada isn’t alone in seeing a deterioration in housing affordability, however. A similar story is playing out in other countries as central banks have tightened monetary policy to control surging inflation.

In a recent report, DBRS Morningstar noted that the pandemic increased demand for housing, limiting the available supply of homes for sale in most markets. “This, combined with highly expansionary monetary policy, helped spur substantial increases in housing prices in many advanced economies during 2020 and 2021,” it said.

Since then, prices have eased, with Canada seeing a 15.4% decline from its February peak, while prices in Sweden are down 11% since peaking in March. Even though prices are down in all six economies, they remain above 2019 levels.

Compounding the higher prices still faced by homebuyers has been the “substantial” rise in interest rates experienced in most countries, DBRS added.

The report noted that the trend in housing affordability is generally similar among the group of six advanced economies it analyzed: Australia, Canada, the Netherlands, Sweden, the U.K., and the U.S.

“Only the U.K. appears to be at its weakest point in terms of affordability, but all six countries have experienced a considerable deterioration in the past 12 months, including even Sweden and Canada where falling prices have somewhat offset the interest rate shock,” the DBRS report noted. “Meanwhile, the U.S. and U.K. appear to be experiencing the largest affordability shock for new homebuyers.”

Source: DBRS *Mortgage payments based on a new mortgage with 80% LTV.