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The Latest in Mortgage News: Housing Affordability Reaches Worst Level in 31 Years

Housing affordability in Canada has deteriorated to its worst level in 31 years, according to RBC Economics.

The bank’s aggregate affordability measure rose 1.6 percentage points in the fourth quarter to 49.4%. In the past year alone, the deterioration reached a near-record 7.2 percentage point. A move of that scale happened just once before, in 1990.

“Rapid price escalation in the early months of 2022 has already raised the bar to impossible levels for many homebuyers,” noted RBC’s Robert Hogue, adding that increased investor participation “further stirred up the buying frenzy” and helped drive a divide between demand and supply.

“And with the Bank of Canada now in the process of hiking interest rates materially—we expect a total increase of at least 150 basis points in the coming year—ownership costs look set to spiral even higher,” he continued. “Worst-ever affordability levels could well ensue, putting buyers in a precarious spot.”

Since the fourth quarter of 2019, the average benchmark price in Canada, based on RPS data, is up 34.2%. The rise has been more extreme in select municipalities, with prices up 46% in Halifax over the same period, 40.9% in Ottawa, 34% in Toronto, 33.2% in Montreal and 29.6% in Vancouver.

As a result, higher prices and larger mortgages have made buyers more sensitive to interest rate changes compared to 10 or 15 years ago, Hogue added.

“A one percentage-point rise in rates currently would boost payments by $315 per month for a standard home in Canada (valued at $775,000), or roughly double what the increase would have been 10 years ago,” he said. “Relative to household income, the impact is two-thirds larger now.”

Mortgage Professionals Canada brings its message to Ottawa

Last week, Canada’s national mortgage broker association called on Ottawa to increase its support for first-time buyers.

Representatives from Mortgage Professionals Canada met with key political decision-makers, pressing the need for the federal government to follow through with its previously made commitments to support first-time buyers and relieve “constraints” in the housing market.

“In the lead-up to the most recent federal election, MPC was very encouraged by the clear commitments made by Canada’s major political parties related to supporting homeownership and first-time homebuyers,” said Paul Taylor, President and CEO of MPC.

The promises included changes to mortgage insurance qualification and re-evaluating the mortgage qualification stress test, he noted.

“[We met] with ministers, senators, members of Parliament and senior staff to discuss these and other policy levels that should be implemented as a means to provide support for aspiring Canadian homebuyers.”

MPC, which represents nearly 15,000 members across Canada, has also long-advocated for the introduction of 30-year amortizations for insured mortgages, which could help lower monthly payments for new buyers.

“It’s quite clear to policy-makers and the Canadian public that urgent action is needed to allow certain first-time home buyers access to homeownership, which will help the government meet its stated priority of growing the middle class,” said Joe Pinheiro, chair of MPC. “The implementation of MPC’s recommendations can help achieve this.”

Ontario government hikes foreign home buyer tax to 20%

Non-resident home buyers in Ontario will soon be paying more to purchase property in the province.

The Ontario government announced this week that it will increase the Non-Resident Speculation Tax to 20%, up from 15%, and will expand its coverage province-wide. Currently, the tax only applies to foreign nationals purchasing property in the Greater Golden Horseshoe Region.

“Young families, seniors and workers are desperate for housing that meets their needs,” said the province’s Minister of Finance, Peter Bethlenfalvy. “But a lack of supply and rising costs have put the dream of homeownership out of reach for too many families in the province.”

The provincial government said it is also working to implement a Vacant Home Tax, which it considers an additional tool to increase housing supply.

The City of Toronto already has such as tax, and other municipalities, including Ottawa, are also looking to adopt similar measures.

The current 15% Non-Resident Speculation Tax was first introduced in 2017.

The government said it will also close several “loopholes” that exist in the form of rebates. It will remove rebates that currently exist for foreign students enrolled in full-time studies in the province for at least two years after their purchase, and also for foreign nationals who work full-time continuously for one year after their purchase.

Rising rates and inflation fears drive consumer confidence to a 14-month low

Consumer confidence fell to its lowest point in over a year on fears over Russia’s invasion of Ukraine, surging inflation and rising interest rates.

The Bloomberg Nanos Canadian Confidence Index came in at a reading of 56 last week, down more than three points from February and its lowest point since last January.

And for the first time since 2020, a majority of Canadians now believe the economy will weaken over the next six months.

Inflation expectations keep rising among businesses

Despite a small uptick in optimism, small businesses are growing increasingly concerned about inflation, according to the latest reading from the Canadian Federation of Independent Business (CFIB).

“Small businesses are starting to feel more optimistic as many restrictions are lifted across the country, signalling a new phase of this pandemic,” said Simon Gaudreault, CFIB’s VP of National Research. “However, other indicators of business health show that there are many concerns on the horizon, namely higher costs, supply chain challenges and labour shortages, which may hold back business recovery.”

Additional challenges faced by businesses in March included supply chain issues and labour shortages challenges.

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