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The Canadian real estate market has hit unprecedented levels of unaffordability, signaling a pattern historically tied to subsequent recessions. According to BMO, the Bank of Canada's Housing Affordability Index (HAI) in Q3 2023 experienced significant erosion, with housing costs demanding 55.2% of household income. This level surpasses even the peak of the 90s real estate bubble, trailing only behind the inflation crisis of the early 80s. Despite the recent slowdown due to increased interest rates, this level of unaffordability has consistently preceded economic downturns in the past.

The Bank of Canada's index, which measures the percentage of household income required to service a mortgage, reflects the strain on households' financial resources. The surge in housing prices propelled by low rates led to a frenzy of speculative buying and a subsequent spike in borrowing costs. This sharp decline in affordability historically precedes a bubble burst, followed by a sudden improvement in affordability, indicative of an impending recession.

Douglas Porter, BMO's chief economist, points out that past instances of such unaffordability, notably in the early 1980s, early 1990s, and 2007/08, were swiftly followed by recessions. As housing costs escalate, it diverts funds from productive areas like investment and consumption, leading to reduced cash flow for households and subsequent revenue shrinkage for businesses. Consequently, BMO anticipates a challenging growth environment for the Canadian economy in 2024 due to these concerning indicators.

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