Good morning,
It looks like housing affordability could finally be moving in the right direction, new research from National Bank of Canada suggests.
In the fourth quarter, the mortgage payment as a percentage of income on a median home shrunk for the first time in nine quarters, according to a research note from National Bank economists Alexandra Ducharme and Kyle Dahms, released on March 7.
“Not only was it the largest improvement in over three years, but it also ended the longest sequence of declining home affordability since the 1986-89 episode,” Ducharme and Dahms said in their note.
Not that the latest number is stellar, the pair acknowledged.
Using a five-year benchmark mortgage rate of 4.7 per cent, the economists calculated that, nationally, the mortgage payment as a percentage of income on a “representative” home stood at 64.6 per cent in the fourth quarter. “That is not to say that the median home is now affordable,” they wrote.
In the third quarter, the composite mortgage payment as a percentage of income was 66.9 per cent. The only time it was higher was in the third quarter of 1981, when it rose to 72 per cent.
Housing is considered generally considered “affordable” when its costs account for roughly one-third of disposable income.
Still, Ducharme and Dahms said they believe the improvement in housing affordability has room to run.
“Given our view for further declines in home price and decreasing mortgage rates, we expect affordability to improve in the coming quarters,” they said.
From the third quarter to the fourth quarter of 2022, the benchmark five-year mortgage rate rose 17 basis points. For the first quarter, “they (rates) might go up a bit but they seem to be stabilizing,” Dahms said, noting the Bank of Canada’s rate decision on March 8 should help.
The Bank of Canada held its benchmark lending rate at 4.5 per cent, breaking a streak of eight straight rate increases starting on March 2, 2022, with a 25 basis point hike from 0.25 per cent to 0.5 per cent.
While interest rates take a break from rising, home prices have spent the better part of the last year coming down the other side of the price mountain. Home prices for the fourth quarter fell 3.9 per cent from the third quarter in 2022, National Bank said.
Further, the Canadian Real Estate Association reported in February that home prices declined in January, with the MLS home price index down 1.9 per cent from December and 12.6 per cent from the year before.
Of the 10 markets that National Bank covered in its report, it said that affordability improved in eight: Victoria, Hamilton, Toronto, Vancouver, Ottawa-Gatineau, Montreal, Winnipeg and Quebec. In Edmonton and Calgary, affordability deteriorated, the report’s authors said.
In Toronto, affordability still looked pretty daunting.
The mortgage payment as percentage of income was 88 per cent, down from 92.4 per cent in the third quarter, but still well above the urban composite measure for all dwellings of 64.6 per cent. With a median home price of $1.2 million, that meant prospective buyers needed to round up a minimum cash downpayment of $237,243.
In Calgary, where affordability deteriorated, the numbers looked much more inviting, with National Bank economists calculating the mortgage payment as a percentage of income of 38.8 per cent, up from 36.8 per cent in Q3, requiring a minimum downpayment of $27,138 on a median home price of $521,385. Farther north in Edmonton, the mortgage payment as a percentage of income was 33 per cent, requiring a downpayment of $21,802 for a median priced home of $436,039. The mortgage payment as a percentage of income was 31.4 per cent in the third quarter.
“The current level of interest rates is restrictive and signals that home price declines are not over yet,” Ducharme and Dahms wrote.
