Toronto just had its worst deterioration of housing affordability in 41 years

Aug 17 2022, 4:07 pm

Toronto has experienced its worst deterioration of housing affordability in more than 40 years.

The stark, yet unsurprising realization, is courtesy of The National Bank of Canada’s recently released Housing Affordability Monitor for Q2 2022.

“In the Greater Toronto Area, the second quarter of 2022 was marked by the highest quarterly deterioration in affordability since 1981,” the report reads.

The mortgage payment as a percentage of income (MPPI) gained 15.4 percentage points in the second quarter, sending the measurement to its highest level on record — 91.0 percentage points.

The MPPI is measured as the monthly payments on a medium-priced home assuming a 25-year amortization period and a five-year term. The resulting amount is presented as a percentage of median household income, the data for which is sourced from Statistics Canada.

In the GTA, the level of the MPPI remained “way above” the city’s 20-year average of 50.0 percentage points, and the urban composite of 63.9 percentage points.

The deterioration in affordability can be attributed, in part, to the increase in home prices across the city — they grew 6.0% in the second quarter and 22.7% annually.

Both the condo and non-condo segments, which include single-detached and semi-detached homes, registered “steep declines” in housing affordability, the report said.

The 0.7% increase in income in the second quarter could not offset the pressure piled on by the rising home prices and climbing interest rates. For condos and non-condos alike, both the quarterly and annual deteriorations in affordability surpassed the composite average.

The price of a representative non-condo dwelling in Toronto is now $1,408,797. The annual household income needed to afford such a property is $265,664; according to data from the City of Toronto, the average annual income in the city is $98,174.

If you met the income requirement, which the bank calculates based on the assumption that a household devotes 32% of its pre-tax income to a mortgage, you’d need to save 10% of your salary for 382 months to afford the down payment.

An annual household income of $168,159 is needed to afford a representative condo in Toronto, which costs $764,876. Seventy months of saving are needed to afford the down payment.

The MPPI for a non-condo property in Toronto is 98.2%, and 53.3% for a condo. Quarter-over-quarter, the figures rose 16.6% and 9.0%, respectively.

Canada-wide, housing affordability deteriorated by 10.4 points in Q2 2022, marking the sixth consecutive quarter of decline, the report noted, as well as the worst quarterly and annual deteriorations in 41 years.

“The mortgage on a representative home in Canada now takes 63.9% of income to service, the most since 1982,” the report reads. “While home prices continued to rise in the second quarter, affordability mainly deteriorated on the back of rising mortgage interest rates.”

The five-year benchmark mortgage rate, which the bank uses to calculate affordability metrics, rose 123 bps in Q2 2022, the largest quarterly change since the same quarter in 1994. The increase represents a 14.4% increase in mortgage payments on the national composite or an additional $500 per month.

Despite the decrease in affordability, the bank says it is noticing a “considerable slowdown” in the resale market, with home sales now 12.8% below their 10-year average.

“This downswing should translate into lower home prices in the months ahead with our current forecast calling for a 10% decline,” the report reads.

“This development, combined with a stabilization of the benchmark five-year mortgage rates should improve affordability before the year end.”

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