Canadian housing market unaffordability is still on the rise

Please note: This article updates the analysis we did in March 2021 on housing affordability. You can review it here.

In March 2022, rising post-pandemic consumer demand, coupled with supply chain bottlenecks and labour shortages, led to a significant rise in the price of almost everything in the past year. Inflation reared its ugly head, rising to 4.8% in 2021 (its fastest pace since 1991), and so far in 2022, annualized inflation has risen to 6.7% in March. Attempting to rein it in, the Bank of Canada raised interest rates by 0.25% in March, and 0.50% in April 2022. Some anticipate another half-percent increase in June, and possibly more in the latter half of the year.

What does rising interest rates mean for the Canadian housing market? As housing prices continue to rise, so are borrowing costs. Where does this leave a prospective home buyer?

The Canadian government recently tabled its budget, which proposed several measures targeted specifically at Canada’s red-hot housing market. Most of the initiatives are focused on first-time home buyers, trying to give them the boost they need to get into the market. Other initiatives target the low number of homes available. We will be providing an overview of many of those programs in our blog in the coming weeks.  

As recently as early spring 2021, we asked the question, Is Canada's housing market the least affordable it has ever been? We ran the numbers, taking into account both historical interest rates[i] and inflation[ii], all the way back to 1975. Turned out that, yes – housing in March 2021 was less affordable than it had been for the past 45 years.

Given the recent rise in inflation and interest rates, we wanted to see where the housing market is right now, so we took a fresh look at the numbers.

The cost of a house in Toronto

In 1975, the Toronto Regional Real Estate Board reported the average sale price for a house at $57,581.[iii] By December 2021 yearend, the average Toronto house price had climbed to $1,095,381. Though the jump appears to be huge, this works out to an annual compound growth of just 6.61%.

However, the real estate numbers in just the first quarter of 2022 were up yet again, the average Toronto region house sale rising 19% to a whopping $1,299,894.

Source: Toronto Regional Real Estate Board Historical Statistics

So, what is fueling the recent meteoric rise in house prices? One factor is the lack of supply. There simply are not enough houses on the market for those who want to buy. As pointed out in a recent article, the number of private dwellings per capita in Canada is below that of the U.S. and the U.K., and significantly lower than European G7 countries.

Another important factor is in the recent rise in interest rates. Many Canadians have been driven by the desire to purchase something – anything – before houses become truly unaffordable (one could argue that has already happened). They have had to chase listings as soon as they are available, with multiple bids far above listed prices, abandoning conditions and inspections. The knowledge that interest rates are on the rise after many years of historic lows is also prompting many to act more quickly with respect to housing.

Very recently, since interest rates began to rise, there has been some softening in Toronto’s real estate market, with housing prices dipping just a bit. But with rising interest rates, the costs of carrying a mortgage just went up – so housing affordability overall has not improved.  

Mortgage affordability in 2022

While 2022 house prices may be difficult to stomach, our analysis was more interested in the affordability of houses. We wanted to know if a mortgage on a house today would be more or less expensive than a mortgage held in any year from 1975 to March 2022. To be consistent in our analysis, we assumed that throughout the years, a buyer would put 20% down on their house and hold a 25-year mortgage.

In 1975, with an average sale price of $57,581 and 11% five-year mortgage interest rate, a buyer would hold a mortgage of $46,064.80. After 20% down, in a 25-year mortgage in 1975, a buyer would be paying $451.49 per month to carry this mortgage. This was true in 1975 dollars, and so needs to be adjusted for inflation to compare to current rates. Using annual CPI numbers to adjust $451.49 cost to today’s purchasing power, that equates to a $2,204.52 monthly mortgage cost.

Sources: Toronto Regional Real Estate Board Historical Statistics, Ratehub 5 Year Mortgage Rate History, Statistics Canada Consumer Price Index (annual average, not seasonally adjusted)

We performed the same exercise for each year between 1975 and March 2022 to better understand where we currently sit compared to historical mortgage costs (see Affordability of Mortgage chart above). Highlights include:

  • The average monthly cost of carrying a mortgage (adjusted for inflation) over the time frame analyzed was $2,773.03.
  • The least expensive year was 1997, when the monthly cost of servicing a similar mortgage was $1,871.47.
  • The third-highest cost was in 1990, with a carrying cost of $4,506.22 per month.
  • The second-highest cost was in 2021, at $5,016.15 per month.

 

Most importantly, in just the first three months of 2022, the carrying cost for a mortgage reached $5,952.69 per month, its highest level in over 46 years.

Is there cause for hope?

Would-be first-time home buyers are justifiably frustrated. Many have been waiting to get into the home ownership club only to watch house prices climb higher, interest rates rise and inflation skyrocket. And it is not just first-time buyers that are having trouble in the current environment. There are many others going through changes in life and lifestyle, looking to downsize for retirement, upgrade for more space (which became so important during the pandemic and the shift to working from home).

In comparing affordability between 1990 and today, it is important to look at the environments. From 1985 to 1990, housing markets jumped 150.88% in only five years. Despite average sale prices increasing strongly in recent years, it took nine years (from 2011 to 2021) to experience the same growth of 150%. One major difference in today’s environment is the historically low interest rates. In 1990, interest rates had room to decline. As that happened, housing prices and affordability normalized.

If past history provides any lesson, it is that for housing to normalize to a more affordable level, interest rates have to , or housing prices have to decline.

In today’s environment, the rapid rise in inflation suggests that central banks will likely raise interest rates significantly in 2022 and possibly beyond. The Bank of Canada rate has already risen 0.75% in a few short months. This should put downward pressure on housing prices, but will that be enough to make the Canadian housing market affordable?

Higher interest rates will likely impact many prospective home buyers’ abilities to service their mortgage debt, given higher home prices and higher borrowing rates. And some believe that will be enough to put significant downward pressure on housing prices in the coming year.

Book a complimentary call with us today if you would like financial guidance in today’s market and the recent Federal budget announcements.

Sincerely,

Your Tall Oak Private Wealth Team

 

[i] https://www.ratehub.ca/5-year-fixed-mortgage-rate-history

[ii]https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000501&pickMembers%5B0%5D=1.2&cubeTimeFrame.startYear=1975&cubeTimeFrame.endYear=2020&referencePeriods=19750101%2C20200101

[iii] https://trreb.ca/files/market-stats/market-watch/historic.pdf

 

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