Canadian real estate has been slipping in terms of affordability, but it turns out it’s not the worst it’s ever been. National Bank of Canada (NBC) economists crunched the numbers on mortgage payments throughout history. They do warn that this market is the least affordable since the early 1990s real estate bubble. However, home prices have seen peaks of unaffordability higher than the current levels.
About The Calculations
NBC economists use the median income, the median cost of a home, and mortgage with a 25 year amortization, at a 5-year term. They then calculate what percentage of gross income would be required to service these mortgages. As a general guideline, shelter is considered affordable when you’re devoting less than 30% of your gross household income towards total payments. It’s worth noting here that the median household has never been able to get the median cost of a house lower than 30% across the general country.
The percent of income the median family would have to devote to servicing a mortgage on a median home. Conventional mortgage, at a 25 year amortization, using a 5 year fixed. Source: National Bank of Canada.
Canadian Real Estate
The median family is having the worst time with affordability in just under a decade across Canada. At the end of the third quarter in 2017, the median family would consume 47.17% of their income servicing a mortgage on a median home. The last time it was this high was in the first quarter of 2008. This is 51.24% lower than the all-time high in the third quarter of 1981. The peak was a massive 71.34%. Affordability is worsening across the country, but it’s definitely not the worst it’s ever been.
Toronto Real Estate
Toronto had a very quick run over the past year, so it’s no surprise incomes didn’t keep up. It would currently take 71.76% of the median family income, to service a mortgage on a median home. This is the highest level seen since the fourth quarter of 1990. It’s still 14.41% lower than the all-time high achieved in the second quarter of 1990.
Vancouver Real Estate
Vancouver has always been one of the most expensive places for homeownership in Canada, but we’re not quite at a high for unaffordability. Currently it would take 79.87% of a median family income to service a mortgage on a median home. This is the highest it’s been since the second quarter of 1990. We’re currently 18.2% lower than the all-time high of 97.64%, achieved in the third quarter of 1981. Surprisingly, Vancouver has been less affordable.
Montreal Real Estate
Despite claims of Montreal prices “soaring,” the city is pretty close to the most affordable it’s ever been. Currently the median family would need 28.79% of their income to service a mortgage on the median home. This is the highest it’s been since the first quarter of 2016. We’re 44.8% lower than the all time high of 52.16%, which was achieved in the third quarter of 1981. Homeownership affordability has been substantially worse historically.
Looking at the chart there’s one other thing that’s fairly obvious to most economics nerds, recessions. The early 1980s, early 1990s, and 2006 peaks were all followed by significant recessions in Canada. This typically results from the higher levels of debt servicing, which reduces the amount of spending across the general economy. At our current levels of unaffordability, it would be nothing short of a miracle to avoid a recession here.
Like this post? Like us on Facebook for the next one in your feed.
Is there any way you could add to this by letting us know what interest rates were at the peaks of unaffordability? I’m only asking because if interest rates were high compared to today’s low rates, then things could get substantially worse. In essence making affordability impossible for some current homeowners.
Let’s not forget (I know you know) that interest rates are night and day from the early 1990’s. To be at these levels of unaffordability, and debt, with rates so historically low – now that is record territory. When housing started to slide in the 90’s, BoC cut rates 1000bps to help put a floor under falling prices. To use an analogy readers will understand – superman won’t come to save the day when the next crisis hits…
Interest rates were 14%.So it wasn’t the house that was unaffordable. These guys aren’t telling the whole story any more.
The title of this article should be “cost of borrowing then and now” than state of affordability. Two most important differences between now and 90’s is insanely high debt levels and over inflated house values.
Nowadays the interest rate are low and for long time as never before. This caused the bubble in the real estate but also in Vancouver trilions of dollars poured in the real estate used as bank account for the foreign investors and not only. In the passed months as everybody knows we had the 15% for the foreign and the 2% stress test + 20% down payment. Something still missing like the speculation in the new projects which they are not effected by the 15% and cause the price of the land keep going to rise. Also if is a dirty money does not care about 15% or real estate price. In my opinion should be avoided let Trillion of dollars come in Vancouver or Toronto even if is clean money. One of the big difference today is the use of the central bank like last resort to save the system and be able to keep low interest rate which in the 90`s or even till 2007 was not. The government and the financial Institutions are trying to slow down the property price to avoid more social problems but if works need time and a little pain…….there is always a price to pay nothing is free so people made millions but now they need to lend to the own kids.
Does this mean there’s no bubble?
Uh no…it means the bubble is already bursting. Regardless of house values, if the owners can’t afford their homes, the system is broken. It doesn’t matter how much house values rise, these people are in way over their heads, and they can’t afford their homes. So any little tweak in this house of cards, and the whole thing come crashing down. Recession, interest rate hikes, bankruptcy, etc. It’s not when is it going to pop, it’s done, it’s how bad will the crash be.
Instead of asking about a housing bubble, you should be asking how many of these fraudulent mortgages are backed by CMHC, and who approved them.
Yup – ‘C’ has nailed it, Vancouver’s bubble has definitely popped. You can tell by the modest 3% rise in prices over the past year.
LOL … and it will grow indefinitely.
By the way Canada and BC in particularly is a broken system like or more than USA. Read:
http://www.vancouversun.com/business/sell+bonds+china/11577820/story.html
Sal, it’s even worse out west with “luxury vacations” being offered to real estate shoppers…it’s nuts https://butiqescapes.com/escape/real-estate-shopping/
[…] Is Canadian Real Estate The Least Affordable It’s Ever Been? Nope […]
Very well graphed statistics….but some things are still not mentioned which makes the clear picture.
[…] Toronto family income to service your average Toronto home mortgage. National Bank of Canada (NBC) economists are saying that the Canadian real estate market is at its least affordable since the real estate bubble of the […]