Pundits have been predicting economic trouble from our overheated housing market for a long time. It’s kind of like being on a canoe trip with someone who keeps hearing the roar of rapids in the distance.
However, sometimes you do drift around a river bend and find rapids ahead. We’re now at that moment when, if you haven’t already, you should get your feet off the gunwales, find your paddle and seal up your dry bags.
Economists at National Bank said recently that Canada saw 11 quarters of declining housing affordability, the longest run up since the 1980s. Housing affordability factors in not just house prices, but also incomes, interest rates and the resultant monthly mortgage payment.
Yukoners have limited life experience with this kind of event. Except for grizzled Sourdoughs of the Yukon housing market who may remember 5-year fixed mortgage rates hitting an eye-watering peak of 20.75 percent in 1981. That was when the Yukon had its very own bank failure, as Whitehorse Credit Union was swamped with bad debt.
It was a grim time. The Faro mine was in trouble. Interest rates were through the roof. The aftershocks of sky-high oil prices were still hitting wallets. Yukoners were losing their homes. Kids reported classmates suddenly disappearing as some families left the Yukon to live with family Outside.
Today, the national figures in the bank’s report are remarkable. The monthly mortgage payment on the median house, assuming a 5-year term and 25 year amortization, would be almost 70 percent of median income. In plain English, for the average family on a typical income, they would have to spend almost three-quarters of their income to afford the typical house.
An unofficial guideline for affordability is to limit your housing expense to a third of your income, half the number in the report.
For some, this time will be even worse than the 1980s. Back then, interest rates were higher than they are now. The Bank of Canada says five-year fixed rates are around 6.5 percent (not counting discounts), a fraction of the early 1980s, but houses are far more expensive. That means much higher mortgage balances to pay interest on.
Back in 1981, the average house price in Canada was $239,693 in today’s money. With a 20 percent down payment and a mortgage at 20.75 percent, that works out to a monthly payment of $3203.
National Bank says the median home price in Canadian urban areas, as of the latest data, was $801,423. A 20 percent down payment and a mortgage at 6.5 percent works out to monthly payments of $4295.
The biggest shock is for people who chose variable rate mortgages, which were extremely cheap during the pandemic. Ratehub.ca says that the variable rate actually paid by borrowers, including discounts from the posted rate, was as low as 0.9 percent earlier this year. At time of writing it is 4.75 percent, more than five times higher.
That typical Canadian mortgage costs $2387 at 0.9 percent. At 4.75 percent it costs $3638, $1251 more per month. That takes a $15,012 bite out of the family’s after-tax income per year.
People who got five-year fixed mortgages are insulated from this effect, at least until they renew. The Bank of Canada says that three-quarters of people with variable rate mortgages have the kind with fixed monthly payments. With this product, you pay the same amount each month. But if interest rates go up, then more of your payment goes to the bank and less to pay down your debt.
The problem comes with the so-called trigger clause. In many cases, if interest rates rise so much that all of your payment is consumed by interest, then the bank will hike your monthly payment. The Bank of Canada estimates that 13 percent of all mortgages in Canada have reached their trigger rate. And this estimate was made before the Bank raised rates, again, on December 7.
Perhaps there is calmer water ahead. The National Bank report shows that house prices have fallen significantly in Toronto, Vancouver and other markets. In 2023 or 2024, if interest rates subside as many forecast, households will enjoy the double benefit of lower rates on lower prices.
However, the Yukon may be different. The third quarter housing report from the Yukon Statistics Bureau showed our housing shortage is still raging. The average sale price of a Yukon single family home surged, again, to a record: $701,200.
What does all this mean for Yukoners? For those who rent, bought a long time ago and have paid off big chunks of their mortgage, or locked in for five years at fixed 2021 rates, the pain may be limited or nonexistent. For those who bought recently and have variable rate mortgages, the situation is very different.
How many Yukoners is this? There are about 19,000 households in the Yukon. If we take the national figures for the percentage of households that have mortgages, we get to about 7500 mortgages. If the same percentage of Yukon mortgages have been triggered as the Bank of Canada estimates nationally, that gets us to around 1000 Yukon households that have received trigger letters from their banks.
Think about that. A thousand families in our community are going through some severe financial stress right now.
Sometimes housing market statistics seem dry. But for the families affected, these numbers are vivid. The pain will be real and, if the early 1980s are any guide, will affect our community in many different ways in the months ahead.
Keith Halliday is a Yukon economist, author of the Aurore of the Yukon youth adventure novels and co-host of the Klondike Gold Rush History podcast. He won the 2022 Canadian Community Newspaper Award for Outstanding Columnist.