The Latest in Mortgage News: BoC’s Affordability Index reaches worst level since 1991

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Housing affordability deteriorated to its worst level in over 30 years, according to data from the Bank of Canada.

The BoC released the first-quarter results of its Housing Affordability Index (HAI) this past week, which rose sharply compared to the previous quarter.

The data shows a household must now devote 42.8% of its disposable income to housing-related expenses. That’s up from 39.7% in Q4 2021 and 34.7% a year earlier.

The Index measures the share of income needed for housing costs such as mortgage payments and utilities, but excludes property taxes.

The release follows similar findings from National Bank of Canada’s first-quarter Housing Affordability Monitor. That measure, which strictly tracks mortgage carrying costs, saw its fifth consecutive deterioration.

“For the first time since 1994, it would take more than 50% of income for a representative household to service the mortgage on a representative home in Canada’s main urban centres,” NBC noted.

The change was driven by a then-46-bps quarterly increase in the 5-year benchmark rate used in the report’s affordability metrics—the largest quarterly increase since 2013.

Both fixed and variable rates have since risen substantially since then.

Desjardins revises its housing market outlook

Desjardins is the latest bank to revise its forecast for the country’s housing market.

In a research note released Thursday, Desjardins economists said they expect home prices to fall between 20% and 25% from the February peak to December 2023. Previously, they had forecast a 15% decline.

“After peaking in February at the national level, home prices continue to fall and
have further to go before they find a bottom,” they wrote.

However, “despite the accelerated pace of decline, we remain of the view that home prices will end 2023 above their pre-pandemic levels nationally and in each province,” they added. “This is not likely to be the case for sales, however, which have fallen enough that most housing markets have returned to balanced territory.”

Desjardins noted that its “gloomier outlook” are due to a bout of weak data so far this year, along with more aggressive monetary policy tightening than expected.

“However, weakness in the Canadian economy primarily attributable to the housing market downturn should prompt the Bank to begin cutting rates by the end of next year,” the economists added. “Markets seem to be predicting this already as bond yields have likely peaked.”

The revision follows similar moves by RBC (link) and BMO. RBC economist Robert Hogue wrote recently that he expected home resales to fall nearly 23% this year and 15% next year, with the national benchmark price falling a total of 12% “from peak to trough” by the second quarter of 2023. BMO, meanwhile, expects prices to drop more than 20%.

Prices for cottage properties continue to soar: RE/MAX

Despite a softening real estate market across the country, Canada’s recreational properties are continuing to see strong demand, according to a recent report from RE/MAX.

While sales of recreational properties are down sharply, average prices remain well above year-ago levels as of May.

“Supply levels are still at historical lows, which means that if we see a continued moderation in sales activity, there is ample room for the market to absorb a welcome increase in available listings,” said Chuck Murney, the President of the Lakelands Association of Realtors. “Prices are still trending near all-time highs but have begun to show signs of topping out.”

Here are some examples of how cottage prices have held up across the country, again as of May 2022:

  • Kawartha Lakes, ON
    • Sales: -35.5% (year-over-year)
    • Median price: $806,000 (+30.4%)
  • Powell River Sunshine Coast, B.C.
    • Sales: Unchanged
    • Average price: $677,950 ((+43.3%)
  • Prince Edward Island
    • Sales: -8.5%
    • Average price: $405,686 (+20.9%)
  • Lethbridge, AB
    • Sales: -3.8%
    • Average price: $348,603 (+7.4%)

RE/MAX added that cottage country is “no longer just the focus of retirees searching for a quiet life in their golden years or families seeking fun in the summer sun,” but rather a hot spot for young professionals who are increasingly working from home.

“The cottage becomes their primary residence, not a vacation home,” the report noted.

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