Affordability worsened for a ninth quarter in a row in Q3, the longest run in three decades. It’s worth noting that the Q3 deterioration – the most acute in 9 quarters – was exacerbated by the impact of higher mortgage rates resulting from Bank of Canada summer rate hikes (top chart). At the national level, more than 70% of the deterioration in affordability was due to higher interest rates; in Toronto, it was 90% (top chart). In Vancouver, affordability fell by the most since 1994 as potential homebuyers were also hit by a surge in home prices. As of Q3, the Toronto and Vancouver markets are now the least affordable since the early 1990’s (middle chart). Given the Bank of Canada’s stated intention to continue the normalization of monetary policy over the coming year, we expect a cumulative increase of about 100 basis points for the 5-year mortgage rates from the trough. Historically, such a change may have had a limited impact on the housing market but this time could be different. Twenty years ago, a 100 basis points increase in mortgage rates would have caused a deterioration of our national affordability measure by 3.5 percentage points. Today, a similar increase has an impact 60% larger given much higher home prices. The Toronto and Vancouver housing markets are particularly more sensitive to rising interest rates compared to other cities (bottom chart). This, combined with more stringent qualifying criteria for uninsured mortgages announced last week by OSFI, means that those markets are poised to experience home price declines in 2018.