Housing affordability hit its worst level in more than four decades last quarter, according to the Bank of Canada, as housing prices and mortgage rates pushed higher.
The “significant deterioration” comes as Ottawa pushes a new housing strategy that looks to revamp war-time homebuilding efforts in a bid to restore affordability in the market.
The Bank of Canada’s housing affordability index tracks Canadians’ typical mortgage payments and utility costs as a proportion of their income. The central bank found that in the third quarter, the index reached its highest level — meaning the worst degree of affordability — since the second quarter of 1982.
BMO chief economist Doug Porter said in a note to clients on Wednesday morning that the growth in long-term interest rates over the summer and early fall compounded with a rise in home prices in the market, dealing a “double-whammy” to homeowners and prospective buyers.
A National Bank of Canada report from last month also pointed to a “significant deterioration” in housing affordability last quarter.
The bank’s housing affordability monitor released Nov. 1 noted that Q3 marked a step back from three consecutive quarters of improvement in the index, which erased nearly two-thirds of the gains seen in that time.
High demand from population growth and a “chronic lack of supply” in the housing market offset gains in household income last quarter, National Bank said.
On Tuesday, the federal government confirmed a Global News report that Ottawa plans to reintroduce a catalogue of pre-approved home plans for builders to rapidly expand the available housing stock in the country. It mimics a similar effort from Canada, post-Second World War, to scale up the number of homes available for returning veterans.
The affordability situation could well get worse in the current quarter, National Bank added, given a “steady trend” upwards in mortgage rates in October.
“If interest rates hold at their current level, it would only take a home price increase of two per cent in the fourth quarter to surpass the worst level of affordability in a generation,” the National Bank report read.
Since that time, however, the bond market has weakened with declining yields on some longer-term bonds. These bond yields act as a benchmark for fixed-rate loans, with easing here eventually reflected in offers on the mortgage market.
Porter noted that the last three times Canada faced spikes in housing unaffordability — the early 1980s and 1990s, and 2007-08 — the economy fell into recession shortly after. Canada’s economy contracted in the third quarter of the year, with some major banks expecting a mild recession to hit in early 2024.
“We expect the economy to struggle to grow in 2024,” Porter wrote.
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