Canadian real estate has never exactly been cheap, but it’s rarely this unaffordable. The Bank of Canada (BoC) Housing Affordability Index (HAI) hit a 32-year high in Q3 2022. That means it’s nearly impossible for an average household to buy a home right across the country. The cost of housing has breached an unsustainable level that has never lasted very long.
BoC Housing Affordability Index
The BoC Affordability Index shows the share of income needed to carry the cost of buying a home. Only mortgage and utility payments are included, so the real cost is higher. Income used is the average household disposable income. Home prices are a six-month moving average of those sold on the MLS. Mortgage rates are a weighted basket of 1-,3-, and 5-year fixed rates, as well as the discounted variable rate. Utilities used for payments include water, fuel, and electricity.
Conceptually, it’s similar to the affordability indexes produced by RBC, and NBF. The higher the ratio, the less affordable it is to buy and carry the payments on a home. Unlike RBC and NBF, the BoC uses average income, which tends to skew higher than the median for households. Average home prices also fail to account for quality and size, which is why other indexes at least use a median. Many use a benchmark price, which adjusts for those issues.
The BoC index is not our preferred housing affordability index for actual costs. However, it’s still useful for trend confirmation and knowing the issue is monitored. Whether they use this data or care what it says is a totally different story.
Canadian Housing Affordability Is Eroding Rapidly
Canadian real estate became less affordable in the latest quarter, shows the index. The HAI estimates an average household needs to spend 48.8% of its income to carry a home in Q3 2022. It’s up 0.4 points from the previous quarter, and 11.1 points from last year. The monthly increase was contained by falling home prices. Even so, annual growth at over 11 points is still an absurd move when it comes to the erosion of affordability.
Bank of Canada Housing Affordability Index
The share of disposable income an average household would need to service a mortgage and utilities.
Source: Bank of Canada; Better Dwelling.
Canadian Real Estate Prices Are Never Stable At This Level
Housing affordability is now the worst in over 30 years, according to the index. The share of income needed is the highest since Q3 1990, with only two quarters in the 90s coming in higher. In total, only 8 quarters in the past 50 years have been less affordable according to this measure. Rivaling two of Canada’s biggest bubbles is less than ideal, to say the least.
The index has reached a critical level, an issue confirmed by multiple banks. Earlier this month, NBF warned buyers face the worst affordability since the early 80s. RBC calculations shows we reached the worst affordability ever, surpassing the early 80s. It doesn’t matter which one you’re looking at, none of these data points are good news.
The takeaway is the same—Canada’s housing affordability has reached unsustainable levels. There’s always the risk it can get worse, which some firms expect in the short-term. However, the issue has never persisted for long. Countries where the average household would be in shelter poverty, tend to provide a poor value proposition.
Bank of Canada taking the position that a 2,000 sqft bungalow and a 400sqft condo are substitutes for each other is very Bank of Canada. v
Can we fire Tiff already? That’s what I got from this.
My only problem with Tiff is if he thinks Canada should just follow the US, why does Canada have its own central bank? Oh right, because the Bank of Canada was buying mortgage bonds to keep rates low in 2019 because they intentionally tried to inflate home prices. It really highlights how none of this was an accident, just passing bills to younger people.
They don’t have a choice but to follow (the biggest bond market) the USA. For comparison look at how things are going for Japan.
The Bank of Canada producing its own index that shows they screwed up and they still won’t still to a plan to fix it. No one cares if a banana is 10% higher if they can’t afford a home.
The country is trying to push professionals to live on ramen and canned tuna for basic shelter, and the average Canadian LOVES this.
The average Canadian thinks the Bank of Canada exists just to provide them with mortgage debt, and inflation is created by the grocery stores.
We’re doomed.
Both central banks and inflation are government disruption of free market and direct responsible for what’s going on.
How can our educated population be so ignorant?
The two most nefarious institutions that caused the unaffordability home crisis in Canada are the BoC and CMHC.
1) The Bank of Canada’s sole “raison d’être” is adding liquidity to the banking system to further extend credit and maintain their profitability.
2) There’s no reason that the taxpayers should be the bagholders of bad credit insured by CMHC.
Both these institutions should have been abolished long ago.
Professionals will only be living on ramen if they have acquired debts they can’t comfortably pay. Should someone else be responsible for this? Should the average Canadian accept grocery bills inflating at 10% a year forever just so people who have made bad investments don’t need to accept the consequences of their decisions?
Nothing is going to happen. Prices may dip a little more but not 30-40% like some people wish for.
Problem is that over last 5+ years there are too many people waiting on the sidelines to get in on the realestate. With every price dip more of them are jumping in hence the prices haven’t really dropped significantly because even a seller in trouble can have his property sold before bank forecloses.
List of countries with better quality of life and cheaper housing: anywhere else. Brain drain won’t be just the US. All doors are open for young Canadians moving away. Good luck everyone. Call me when housing is back to 5x income for a decent house me.
Interest rate for a 5 year mortgage Will hit 8 -9% as was the case in the 1990s. House prices will only fall 10-15%. Not enough to make the houses affordable as wages cannot go up 10-15% year on year.
So young people move back into your parents homes so you can survive and save for your future.
Gone are the days of borrowing to spend.
Bank of Canada has a fiduciary duty to ensure that house prices do not drop.
Canada NEEDS housing, it is the country’s economic engine and must be supported by policy and 0% interest rates as needed.
Bank of Canada is not supposed to be doing any such thing. The free market is supposed to set prices of housing and all else, not some central banker sitting in an ivory tower price fixing and money printing. That interference in the economy is the root cause of malinvestments and moral hazard.
We need to get rid of CMHC and all such institutions designed to offload the market gambling losses of banks onto the backs of taxpayers, wage earners, savers and pensioners.
People that already live and work in Canada think this is not ok? Doesn’t matter.
According to our minister of immigration: “Look folks, it’s simple to me: Canada needs more people.”
Did they offer any explanation or would that be too embarrassing?
I couldn’t agree more…It’s a shame we continue to create social programs to prop up incomes when the tax payers are pressed to the point of breaking. I am tired of being the “bag holder” for my governments blunders. Throw money at the problem is increasing the velocity of the train wreck of this economy.
Wait till the real panic starts. Probably around April or May 2023 when all the spring listings fail to sell. Currently there is no reason for any sensible person to buy anything.
A fall from the peak of 40- 50 % is likely. Just to bring us back to about 3 times earning which is a historical norm in lots of real estate markets, we need to fall
70 %, its possible. Lots of real estate and real estate linked employment from lawyers to car salesmen and construction workers will happen and force distressed sales all this year.
Immigration eventually wil bring a rise in demand, but new immigrants will not buy in a falling market, and that could last for quite a while