Despite the recent decline in prices, housing is becoming less and less affordable for average-income households in Canada’s largest cities, according to the most recent report from the Parliamentary Budget Officer.

The PBO’s findings show that the gap between the national average house price and what an average household can afford has increased to 67% in August 2022 from 45% in December 2021 — a jump of 22 percentage points in eight months.

In an interview, PBO Yves Giroux said this is an “unfortunate consequence” of the Bank of Canada’s rapid hike in interest rates as it wrestles to bring down inflation to 2%.

The average national price of a home in Canada reached a peak of $839,600 in February 2022, but it dropped to $777,200 in August, with mortgage rates increasing sharply. In comparison, the average price pre-pandemic was $551,100 in February 2020.

With inflation spiralling out of control, the Bank of Canada increased its interest rate by 300 basis points in the past six months and the average five-year, fixed mortgage lending rate breached 5% in June — a first since 2010, according to the PBO report.

And the interest rates are expected to go up again in October, possibly by another 75 points.

Those hikes are adding even more stress to household borrowing capacity and making it nearly impossible for Canadians to aspire to homeownership. In comparison, as of December 2019, the national house price affordability gap was 20%; in January 2015, it was 2%.

In order to produce his analysis, the PBO examined average house prices and borrowing capacity in selected census metropolitan areas (CMAs) : Halifax, Québec, Montréal, Ottawa, Toronto, Hamilton, Winnipeg, Edmonton, Calgary, Vancouver and Victoria.

While some markets seem more favourable to buyers, such as in Québec and Edmonton, the gap continues to grow in Hamilton, Toronto and Vancouver, among others.

“In particular, we estimate that seven of the 11 CMAs selected have an average price in August that is more than 50% above affordable levels, and all CMAs now have a positive affordability gap exceeding 6%,” reads the PBO report.

Giroux said it was to be expected that higher interest rates would have a negative impact on affordability, but he was surprised to see how big the affordability gap has grown in a matter of months.

His office also expects prices to go down some more.

The PBO constructed two scenarios based on assumed increases in mortgage rates – 6.25% by the end of year — and assumed household debt service ratio in order to gauge the “potential downward adjustment in house prices” over the remainder of 2022.

According to the scenarios — which should not be interpreted as forecasts — prices could decline at the national level from 12% to 23% by the end of the year.

In the first scenario, assuming the debt service ratio of the average household remains at its August 2022 level, potential price adjustments in December 2022 could range from a decline of 5% in Calgary to 20% in Hamilton (12% nationally).

The second scenario, which assumes the debt service ratio of the average household reverts to its December 2021 level, could see prices fall from 22% in Vancouver, Toronto and Ottawa to 30% in Halifax (23% nationally).

“The extent to which average house prices will continue to fall over the coming months will depend, in part, on household debt-servicing capacity,” reads the report.

So will buying a home become affordable again? In the short term, probably not, admits Giroux. In the medium term, he said, it all depends on a variety of factors such as housing prices going down, wages going up significantly and interest rates dropping.

“A combination of these factors could make housing affordable or debt affordable,” said Giroux.

But a decline in prices could also mean “some pain” for current homeowners, said Giroux. “If you’re a homeowner and the value of your property goes down by 10%. That’s not a good thing ….. (even if) it makes housing more affordable.”

PBO : Housing Affordability Gaps Widened in 2022 Despite Falling Prices by Catherine Lévesque | National Post