From National Bank of Canada

Q2 2024 marked a second, albeit smaller, improvement in affordability. The amelioration was relatively widespread with 8 of the ten markets covered experiencing a decline in mortgage payment as a percentage of income (MPPI). The most significant improvement occurred in Hamilton, where a home price decline compounded on the broader trend of lower interest rates and rising incomes. On the flip side, Edmonton and Calgary saw rising home prices largely offset any relief. Overall, the composite improved with slightly higher prices not enough to offset the decline in mortgage interest rates and higher incomes. Still, the housing market remains unaffordable with the latest progress bringing the MPPI to 57.9%. Looking ahead, falling mortgage interest rates will likely be the main driver for improvements in affordability. So far, the decline in mortgage interest rates was precipitated by both expectations of rate cuts and the materialization of easing by the Bank of Canada. Given the deterioration in the growth outlook and the weakening in inflation and the labour market, we expect further central bank easing of 150bps over the next 12 months. Although the policy rate and mortgage interest rates do not always follow in lockstep, this development would provide a significant alleviation of the financing burden. At current income and home price levels, it would bring affordability halfway back to pre-pandemic levels. There is the risk, however, that lower interest rates could lift home prices, especially considering the current population boom. That said, between the payment shock from upcoming renewals and the rising unemployment rate, we do not expect much vigour in home prices for the next 12 months.

HIGHLIGHTS:

• Canadian housing affordability posted a second consecutive improvement in Q2’24. The mortgage payment on a representative home as a percentage of income (MPPI) fell 1.1 percentage points. Seasonally adjusted home prices increased 0.4% in Q2’24 from Q1’24; the benchmark mortgage rate (5-year term) declined 11 basis points, while median household income rose 1.2%.
• Affordability improved in 8 of the ten markets covered in Q2. On a sliding scale of markets from best progression to least: Hamilton, Toronto, Victoria, Ottawa-Gatineau, Vancouver, Quebec, Montreal, Winnipeg. On the flip side, Edmonton and Calgary deteriorated. Countrywide, affordability enhanced 1.1 pp in the condo portion and in the non-condo segment.

https://www.nbc.ca/content/dam/bnc/taux-analyses/analyse-eco/logement/housing-affordability.pdf