House prices across Canada may be tumbling, but housing affordability hasn’t been this bad since the final months of 1990, when Brian Mulroney was still prime minister, a new tax called the GST was winding its way through Parliament and, somewhat ominously, Jon Bon Jovi’s Blaze of Glory blanketed the airwaves.
The Bank of Canada’s housing affordability index, a measure of the share of disposable income of the average household that gets gobbled up by housing-related expenses such as mortgage payments and utility fees, surged to 48.2 per cent in the second quarter, the most recent figures show.
That’s the steepest figure since the fourth quarter of 1990, when the Bank of Canada had hiked interest rates to more than 13 per cent to fight inflation and the housing bubble of the late 1980s began to pop.
Affordability has been worsening since the start of 2021, when the Bank of Canada’s emergency rate cuts, which were instituted to counter the pandemic’s hit to the economy, sent Canadians into a home-buying frenzy and pushed house prices skyward.
However, the latest sharp deterioration in affordability occurred even as the MLS benchmark house price index for Canada has dropped 12 per cent from its peak in March, reflecting the sharp rise in mortgage rates. Since the start of the year, the central bank has hiked its benchmark rate to 3.25 per cent from 0.25 per cent.
If Canada’s housing market correction gains speed, falling prices will improve affordability. However, given that core inflation is still rising, few economists believe the Bank of Canada is finished with the fastest rate-hike cycle in decades. The target rate is forecast to rise as high as 4 per cent by the end of the year.