Rising Interest Rates Further Erode Housing Affordability


Housing affordability has deteriorated in the country’s largest urban markets for the fourth consecutive quarter, largely due to recent increases in fixed mortgage rates.

On average, mortgage payments now require 48.6% of the median income, up 2.1 points from the third quarter and up 7.8 points from a year ago, according to the National Bank of Canada’s Housing Affordability Index. In Toronto and Vancouver, those percentages stand at 67.3% and 73.9%, respectively.

“Over the past year, affordability has worsened at the fastest pace in more than 26 years,” authors Kyle Dahms and Alexandra Ducharme wrote. “While home price growth had its fair share in contributing to declining affordability in Q4, the larger driver was rising mortgage interest rates.”

The benchmark 5-year mortgage rate used in the affordability metrics was up 28 basis points in the fourth quarter, marking the largest quarterly increase since 2017 when the Bank of Canada raised the overnight rate twice in one quarter.

“With investors now anticipating a more rapid increase in policy rates, our benchmark rate has increased by another 30 bps in the current quarter for a cumulative 100 bps since the 2020Q4 rate trough,” the report continued. “All else being equal, such an increase would have translated into a 10.7% decline in purchasing power.”

One mitigating factor has been borrowers’ shift towards variable rates in the second half of 2021—53% of new homebuyers, according to NBC.

“But this escape route is about to vanish in the coming months with the Bank of Canada policy rate on the rise,” the report added.

Saving for a down payment is taking longer

Once again, the length of time it takes to save for the minimum down payment has continued to rise in all 10 markets covered in the report.

On average, it now takes borrowers who rely solely on savings 75.2 months to save for that down payment (based on a 10% savings rate of the median pre-tax household income), up from 74 months in the previous quarter and well above the 40.4-month average since 2000.

In the country’s most expensive markets, the timeframe is even more extreme.

For non-condo properties, it would take the average Toronto homebuyer 28.3 years (up from 27.5 years last quarter) to save up a minimum down payment and 36 years for a buyer in Vancouver (unchanged from the previous quarter).

By comparison, here’s how long it would take to save a 10% down payment in other Canadian markets:

  • Victoria: 358 months for single-family (up from 350.2 in Q3); 53 months for condos (up from 50.4)
  • Montreal: 48 months for single-family (up from 46.8); 31 months for condos (down from 31.5)
  • Calgary: 37 months for single-family (up from 36.1 months); 16 months for condos (down from 16.7)
  • Ottawa: 56 months for single-family (down from 57.3); 26 months for condos (down from 26.5)



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