Just two extra taps on the rate brakes was all it took to bring Canada’s fledgling housing recovery to a screeching halt this summer. Resale transactions fell for the first time in six months in July, as a pullback in pricey Ontario and British Columbia overshadowed gains in less-expensive Alberta, Saskatchewan and Quebec. To get a sense of just how sensitive some regions are to higher rates, glance at Table 1, which shows the percentage of income (before taxes) a median-income family would need to spend on mortgage payments to buy a typical house.
Let’s start with the largest region in the country, Greater Toronto. As of July, mortgage payments would gobble up nearly four-fifths (79%) of family income at current rates. That’s just for the mortgage; you could easily spend another 8% of income on property taxes, heating, condo fees, and other housing costs. The table shows that affordability has worsened in the past year due to higher interest rates and a partial rebound in prices. Need to pass the stress test? Good luck. Qualifying at a rate two percentage points above your contract rate would imply mortgage service costs of 94% of annual income. That’s well above the bar set for federally regulated lenders of 39% which also includes other housing expenses. Also note how much affordability has diminished in the past two decades. Buying a home in 2001 consumed a relatively moderate 29% of income, even with interest rates similar to today. The difference is that prices have run nearly three times faster than incomes since then, spiking the ratio from four times income to eleven. That explains why few buyers can even afford a bungalow, unless they can scrape together a large down payment. It’s also why many need to turn to the condo market to get their foot on the housing ladder. But even here, payments on a typical unit would consume nearly half (48%) of income.
Vancouver is even more expensive than Toronto on a segmented basis (the aggregate price index is weighted more toward lower-priced condos). Single-family detached/semi homes are far more expensive than in Toronto (median price $2.0 million versus $1.4 million), though condos are only modestly costlier ($767k versus $728k). That’s why condos are the go-to choice for newcomers to the city. The next tranche of unaffordable cities is found mainly in Ontario and British Columbia. Cities such as Hamilton and St. Catharines, inexpensive prior to the pandemic bubble, now sport mortgage service costs in the low 50% range.
If you want both affordability and life in the big city, then head to Montreal, Calgary or Ottawa, where mortgage payments consume just one-third of income, and many buyers would still pass the stress test. That’s one reason Calgary now has the hottest market in the country, with benchmark prices jumping 5% in the past four months to record highs. If a smaller city floats your boat, or you just want to make the math work on a rental property, places like Saskatoon, Winnipeg, Edmonton and St. John’s all have mortgage service costs in the low 20% range, while Quebec City and Regina are screaming buys at 18%. Home prices are generally less than four times annual income in these places.
There are still many affordable areas in the country. The problem is that a quarter of residents live in the two regions that are well beyond the reach of most buyers, while many other regions have become terribly expensive in the past three years. Nationally, affordability is the worst (39% of median income) since at least 1988. Relief will come only if interest rates fall sharply and prices lag incomes for a lengthy period. With many markets swinging back toward balanced conditions after a brief fling in sellers’ territory, prices could move sideways for the next half year, which will help. But buyers won’t see meaningful relief until the Bank of Canada eases policy, possibly starting next spring.
Based on 25 year ammortization rate, 5 year fixed rate with assumption about discount versus posted rate, down payment equal to half of annual income (about 10% today) for a house HPI benchmark price; Median family income is estimated after 2020 using average annual growth in previous 10 years; Average home price 2002, 2005, Weighted average house price before 2005; Average home price used.