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Mortgage costs now eat 67% of income in Canada: National Bank

Detached houses covered in snow in a low density suburban residential area.
Any meaningful improvements in housing affordability from falling prices has been offset by climbing mortgage rates.

The last time mortgage costs took this big of a bite out of Canadians’ incomes, Dolly Parton’s 9 to 5 was topping the Billboard 100 chart.

A new report from National Bank Financial Markets said the cost to own a representative home in Canada required 67.3 per cent of income to service the debt, the most since 1981. A representative home is essentially a benchmark property price determined for each market using Teranet-National Bank Home Price Index data.

By National’s calculations, the five-year benchmark mortgage rate used to determine its affordability metrics rose 75 basis points in the third quarter, heaping an extra $300 onto the monthly mortgage payment for a representative home.

"While this surge was less significant than the one observed in the previous quarter, it propelled the benchmark mortgage rate to its highest level since 2010," Kyle Dahms and Alexandra Ducharme, economists and report authors, said on Wednesday.

While home prices have fallen this year in reaction to higher borrowing rates, mortgage rates have simultaneously risen, offsetting any meaningful improvements in affordability.

The report said the average Canadian would need an annual income of $188,776 in order to afford a home, though that number ranges depending on the region.

In fact, Canada is currently in its longest stretch of deteriorating affordability since the real estate bubble of the late eighties, National said. Affordability fell for 11 consecutive quarters back then. Currently, Canadian housing affordability has declined for a seventh straight quarter.

Affordability deteriorated in all ten markets it tracks, but was worst in Vancouver, Victoria and Calgary. Ottawa-Gatineau, Hamilton, Ont. and Winnipeg had the least deterioration.

However, National Bank sees some improvement on the horizon.

“With our affordability indexes at extreme levels in most markets, we see further declines in housing prices. The slowdown in real estate activity in several markets is expected to result in a cumulative 15% decline in home prices in 2023 from the peak (-7.7% to date),” the report authors said.

“This, combined with a stabilization of the benchmark 5-year mortgage rate, should improve affordability in the coming quarters.”

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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