The persistent acceleration in inflation does not bode well for homeownership, which has already deteriorated from quarter to quarter since the start of the year.
October statistics in the United States arouse doubts about the realism of the prevailing scenario believing in a temporary or transitory rise in prices. Inflation accelerated more sharply than expected last month south of the border under pressure from persistent constraints on global supply chains and rising energy prices. The consumer price index rose 0.9% in October against 0.4% in September and despite expectations of 0.6% among analysts.
Compared to October 2020, the increase reached 6.2% against 5.4% in September, the largest increase recorded since the end of November 1990, said the Department of Labor. Excluding the volatile components of energy and food prices, the increase remains high at 0.6% over one month, against 0.2% in September.
For Oxford Economics, the Federal Reserve will have to accelerate the normalization of its monetary policy and end its quantitative easing more quickly. It should also begin to hike its key rates earlier than the December 2022 target set by the research firm.
In Canada too, the latest statistics show higher inflation than expected. Thus, on both sides of the border, central banks recognize that temporary pressures are more persistent and could continue over time, with their attention focused on wage growth and inflation expectations. And these expectations are now based on a greater degree of skepticism about the ability of the Federal Reserve to take the appropriate steps to reverse the growth curve of inflation.
“The latest events support our scenarios, which are based on a general upward trend in interest rates over the next few years. The rise in key rates should be more gradual than what the markets anticipate, but it could continue for longer and bring them back to around the levels observed before the pandemic. Long-term rates thus remain vulnerable to an upward adjustment, ”write Desjardins Group economists. “We have adjusted our scenarios slightly to reflect monetary tightening starting a quarter earlier, in July 2022 in Canada and in September 2022 in the United States. “
Soaring prices
This does not bode well for a real estate market whose access continues to close under the effect of soaring prices. The National Bank’s Homeownership Index in Canada deteriorated in July-September for a third straight quarter since the start of the year. The last 12 months are talking about the most pronounced deterioration in a decade.
Nationally, it would now take 46.5% of a typical household income to pay off the mortgage on a representative house in Canada. And this despite the low interest rates. But the strong falsehood of real estate prices has supplanted the increase in income.
For this representative housing, 74 months are now needed to accumulate the down payment (at a savings rate of 10%) for the median household income before tax, which is double the 37-month average since 2000.
“While mortgage rates have not been an affordability factor this quarter, the outlook is not particularly bright for new home buyers. Based on November data, mortgage interest rates have risen by nearly 25 basis points, with the possibility of further increases as monetary policy normalization intensifies, ”add economists of the National Bank. They estimate that a hypothetical 100 basis point hike in rates represents about a 12% reduction in purchasing power for a single payment.
In Montreal, the mortgage payment on a representative house as a percentage of income (PHPR) reached 37% for a representative dwelling other than a condo – from 26% for the condo – in the third quarter, its highest level in ten years. It now took 47 months of savings (at a 10% rate) to accumulate the down payment for a representative property other than a condo, 31 months for the condo. In other words, and assuming the same savings rate, a household had to earn an annual salary of nearly $ 107,000 to afford representative housing other than a condo, the price of which reached $ 524,500. About $ 75,250 for a representative condo, priced at $ 369,000.
Still according to data from the National Bank, in Quebec the PHPR stands at 28% for representative housing other than a condo, and 19% for the condo. In Ottawa-Gatineau, these percentages are 57% and 26% respectively.