Most Canadians couldn’t buy a house even if they wanted to. National bank of Canada (FBN) is once again sounding the alarm on housing affordability. A typical home needed nearly two-thirds of a household’s income just to pay off mortgage payments in the second quarter of 2022. The quarter saw the fastest erosion in affordability in 40 years, but the bank doesn’t see it last long. Rising tariffs and falling sales are expected to lead to double-digit price drops in the not-too-distant future.

Housing affordability in Canada eroded fastest in 41 years

Housing affordability in Canada has eroded for the sixth straight quarter. Households were expected to spend 63.9% of their income on a typical townhouse in the second quarter of 2022. The 10.4 point increase from the previous quarter was the largest since 1982. Yes, it has been over 40 years since no such thing happened.

Rising mortgage rates and high prices drive lower affordability

Does 1982 sound familiar to you? That’s because it was the last time an inflation and housing crisis forced massive rate hikes to cool buying. It also preceded a house price correction that restored market affordability with higher rates.

Mortgage rates are also the main driver in this case. The bank’s benchmark affordability rate jumped 123 basis points in the second quarter, an increase not seen since 1994. The boost to demand from low rates is now reversed, slowing existing home sales to 2019 levels.

Rates only started to rise at the end of the first quarter and made most of the rise during the second quarter. They really only had time to push up the costs, without (yet) reducing the prices.

The problem is compounded by the rise in house prices in the second quarter. Prices have recently fallen in key cities like Toronto, but that was not the case for most of the country on a quarterly basis. Rising financing costs and rising prices have predictably accelerated the erosion of affordability.

National Bank expects lower house prices to improve affordability

The news wasn’t all bad. FBN views the normalization of home sales as a sign that prices will fall in the not-too-distant future. Most likely a welcome change after the destabilizing gains seen over the past two years.

The bank wrote: “…we are seeing a considerable slowdown in the resale market, with home sales now 12.8% below their 10-year average. This decline should translate into lower house prices in the coming months, with our current forecast calling for a 10% decline. »

The drop is one of the smaller drops expected, but they also use a different index than the central bank. In contrast, Oxford Economics predicts a 24% drop in house prices, while BMO forecasts a price drop of a similar size in the coming months.

“This development, combined with the stabilization of the benchmark 5-year mortgage rate, should improve affordability before the end of the year,” the bank said.