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Posthaste: Deteriorating housing affordability conjures the 1980s when real estate took a dive Back to video

Good morning!

Deteriorating housing affordability in Canada is giving the bad old 1980s a run for its money, according to National Bank of Canada Economics.

Economists Kyle Dahms and Alexandra Ducharme lined up several current metrics against those from the 1980s and found the data underlying this housing downturn is either beating or close to matching the data from that decade horribilis, when the real estate bubble grew so big that it resulted in a correction lasting more than a decade.

For example, Canada has recorded seven straight quarters of declining housing affordability compared with 11 quarters from 1986 to 1989, Dahms and Ducharme said in an investor note. But “the magnitude of the deterioration is much more pronounced this time,” with affordability falling 25.5 percentage points compared to 20.2 in the 1980s.

For those unfamiliar with the housing market of the 1980s, it was a time of frothiness with house prices in the Greater Toronto Area, for example, more than doubling over three years. Interest rates rose into the double digits before the bubble burst in 1989, with prices subsequently falling for seven straight years.

Housing costs are considered affordable if they account for 30 per cent or less of a household’s budget, but the mortgage on a “representative home” today consumes 67.3 per cent of the average household’s income. The last time the measure was so high, according to Dahms and Ducharme, was in 1981.

Interest rates are obviously far off the almost 20 per cent hit in the late 1980s. Nevertheless, the Bank of Canada has increased rates six times since March to 3.75 per cent from 0.25 per cent, and another increase is expected when the central bank meets next week. The increases have come as a shock to homebuyers used to super-low borrowing rates.

National Bank calculated that an increase of 75 basis points on an average five-year mortgage represents an increase of about $300 per month in home-servicing costs.

More evidence of deteriorating affordability can be found in the Royal Bank of Canada’s long-running index that measures ownership costs as a percentage of household median income. That index’s reading for the second quarter was at 65.9 per cent for a single detached home, while the aggregate measure, representing all types of accommodation, was 60 per cent.

National Bank said home affordability dropped during the third quarter in all 10 of the real estate markets it looked at in the third quarter.

The affordability details are almost not to be believed.

In Toronto, where the median price for all dwellings is about $1.25 million, National Bank calculates, using its five-year benchmark mortgage rate, that it would take a prospective buyer 335.3 months to save up for a 20 per cent down payment of $250,967. Mortgage payments would be $6,967 per month, representing 93.1 per cent of an average household’s income. The current qualifying annual income is $253,934.  In Vancouver, it would take 367.8 months to save up for a 20 per cent down payment of $275,503 on a median-priced house of about $1.38 million.

Things are more reasonable and attainable in Calgary, where it would take 33.5 months to save enough money for a five per cent down payment of $25,101 on a home priced at $501,009. Monthly payments would be $2,782, or 37.2 per cent of income.

In Canada, there are different requirements for minimum down payments depending on the price of a home. The minimum down payment for properties valued at up to $500,000 is five per cent, according to the Financial Consumer Agency of Canada. “Some lenders may require more,” it said on its website. When the purchase price rises above $500,000, the minimum down payment is five per cent for the first half-million dollars and 10 per cent for the remaining amount.

Rising interest rates have at least started to dampen housing prices. The current price of an average home has fallen 10 per cent from its high in February, which is when the Bank of Canada embarked on its hiking campaign. Canada Mortgage and Housing Corp. recently said it expects average home prices to fall as much as 15 per cent from their peak.

National Bank said there is a light at the end of the affordability tunnel. Price declines “combined with stabilization of the five-year benchmark mortgage rate should improve affordability in the coming quarters,” its economists said.

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Bank of Canada governor Tiff Macklem‘s “announcement” during testimony at the House finance committee last week that the Bank of Canada, which typically sends about $1 billion to the federal treasury each year, was about to record losses for the first time in its 87-year history, caused broad ripples among politicians and the general public.

Read Kevin Carmichael and Stephanie Hughes’ breakdown of what you need to know.

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Today’s Posthaste was written by Gigi Suhanic (@gsuhanic), with additional reporting from The Canadian Press, Thomson Reuters and Bloomberg.

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