Canada’s house price correction has been painful for homeowners forced to watch their equity erode. As steep as the price drop has been, however, affordability has still not recovered to historic norms.

In July, the benchmark home price across Canada stood at $661,800, a 21.3-per-cent decline from its peak in March, 2022, according to the Canadian Real Estate Association’s home price index.

The plunge is even more pronounced after factoring in inflation, which ran hot for several years and recently has climbed back up to the top end of the Bank of Canada’s inflation target range of 1 to 3 per cent. Real house prices have fallen back to where they were in 2016, a drop of nearly 30 per cent from the peak.

That’s helped housing affordability recover from the worst period of deterioration since the 1990s, but as Doug Porter, chief economist at Bank of Montreal, wrote in a new note, “The glass remains half empty.”

The Bank of Canada’s housing affordability index, which tracks housing-related costs – in particular, mortgage payments and utility bills – relative to average household disposable incomes, still sits well above its long-run normal.

There are a limited number of ways affordability can “get back to normal,” Mr. Porter wrote. The ideal path would be for Canadian incomes to push higher. Households have made gains on that front in recent years, but the process is slow.

Affordability would also be restored if prices fell further. That’s still happening in some markets, with regional real estate boards in Toronto and Vancouver reporting further annual declines for composite benchmark prices in August of 4.5 and 5.6 per cent, respectively, even as other markets like Montreal and Calgary look more stable.

Lastly, the cost of borrowing money could come down further to help with affordability. Yet with a global run-up in bond yields, which influence fixed mortgage rates, and the Bank of Canada warning that inflation risks are mounting, interest rate relief “certainly does not seem to be in the cards,” Mr. Porter wrote. If affordability is going to improve, “the burden still seems to be on prices.”

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