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No wonder mortgage issuers are risking government ire by dropping rates to attract lenders – the rate of growth in new Canadian mortgage debt has fallen to levels last seen in 2001.

The Canadian housing boom is best understood in terms of affordability. With interest rates plunging in the wake of the financial crisis, lower monthly mortgage payments became affordable for a larger number of prospective Canadian home buyers. More borrowers created more demand for houses, and housing prices rose sharply.

The relationship between housing affordability, as measured by the RBC Housing Affordability Index for Detached Bungalows, and demand for mortgages has evolved over the past 15 years (chart). The Affordability Index measures the average percentage of pretax income that was necessary to pay mortgages and property tax – a rising line indicates the average home was becoming more expensive. (yes, we agree. They should have done it the other way around).

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Before 2000, rising home prices were accompanied by slow rates of growth for mortgage debt. Between 2001 and 2006, total Canadian mortgage debt expanded at a rapid rate while housing costs steadily ate up a larger and larger percentage of household income.

The most interesting revelation in recent data is that, in terms of year-over-year growth rate, the Canadian mortgage market never really recovered from the financial crisis. Before the crisis, outstanding mortgage debt grew at a roughly 10-per-cent annual clip. The latest data shows year-over-year mortgage growth of 5 per cent.

The declining growth rate in mortgage issuance suggests that almost every employed Canadian who wants to own a house already does. Recent home ownership reports, showing the home ownership rate in Canada close to 70 per cent, support that idea.

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