Canada may be facing more challenges than its G7 peers when it comes to housing affordability, housing prices, and indebtedness. With consecutive interest rate hikes across G7 nations, borrowing is getting more expensive for those looking to take on a mortgage. I have recently looked at the information provided by the intergovernmental Organisation for Economic Co-operation and Development (OECD) to analyze where Canada stands in comparison with other G7 countries.
The Bank of Canada has raised interest rates to 3.75 per cent, from just 0.25 per cent in January. The thought behind the hike is to discourage consumers from spending. High interest rates typically mean high debt servicing costs, which eventually increase the cost of everything—from mortgages to credit cards and loans.
House prices in Canada grew at a rate of 48 per cent faster than incomes since 2015, according to the Organization for Economic Co-operation and Development (OECD) Canada's ratio index reached 148.16 in the second quarter of 2022, the highest amongst G7 nations. By comparison, the U.S. house price-to-income ratio is roughly 40 per cent higher.
A drop in house prices could worsen the effects of a slowdown in spending by households with high mortgage debts, an official from the Bank of Canada has warned. In March, she said that Canadian households that have taken out mortgages with high loan-to-income ratios probably aren't the ones who have a lot cash in their bank accounts.
Average home prices in Canada have fallen by 22 per cent in the span of 7 months, according to Wowa's latest housing market report. The cooling housing market in Canada should not be mistaken for increasing affordability. According to the annual data released by OECD, the ratio index for Canada grew 59 per cent since 2015.
In 2020, household debt in Canada was equivalent to 177.3 per cent of disposable income. In comparison, the U.K. has the second-highest household debt at 148 per cent. Canada ranks ninth after countries such as Denmark and Norway that top the list with household debt. An additional concern is that a growing share of new mortgages also has variable rates, which tend to fluctuate with interest rates.
