Housing affordability in Canada worsened by 2.1 points in Q4’21, marking a fourth consecutive quarterly deterioration. Over the past year, affordability has worsened at the fastest pace in more than 26 years. As a result, it would take 48.6% of income for a representative household to service the mortgage on a representative home in Canada. This level is a bit more than the last cyclical high seen in 2018Q4 and marks the worst affordability since the mid-90’s with Toronto, Hamilton, Ottawa and Halifax showing levels not seen since the start of this century. While home price growth had its fair share in contributing to declining affordability in Q4, the larger driver was rising mortgage interest rates. Our 5-year benchmark mortgage rate used by our affordability metrics rose 28bps in the last quarter of the year which was the largest one quarter change since 2017Q3 when the central bank raised the overnight rate twice in the same quarter. With investors now anticipating a more rapid increase in policy rates, our benchmark rate has increased by another 30 bps in the current quarter for a cumulative 100 bps since the 2020Q4 rate trough. All else being equal, such an increase would have translated into a 10.7% decline in purchasing power. However, homebuyers opted for variable rate mortgages in a record high proportion (53%) in the second half of 2021. By selecting this option instead of the typical 5-year fixed mortgage, mortgage holders increased their purchasing power by 10% in the fourth quarter. But this escape route is about to vanish in the coming months with the Bank of Canada policy rate on the rise (we expect a 125 basis points increase in 12-months).