Housing affordability in Canada has reached its worst level in 41 years in the second quarter, shortly after home prices rose and mortgage interest rates began to increase, according to the National Bank of Canada, which recorded the sixth consecutive quarterly decline in housing affordability.

However, with home prices falling significantly in certain markets and steady increases in mortgage rates stabilizing, affordability should start to improve. A bank report stated: "We observe a significant slowdown in the resale market, where home sales are now down 12.8% from their 10-year average," adding that this translates to a decrease in home prices.

While the rapid rise in home prices was largely responsible for the deterioration in housing affordability over the past year, the increase in mortgage rates was the main factor. NBC noted that the five-year benchmark rate used to calculate affordability metrics rose by 123 basis points, the largest quarterly change since 1994.

The report indicated that this increase pushed the benchmark mortgage rate to its highest level since 2011. It found that at this level, it now takes on average 63.9% of household income to service the mortgage in major urban centers in Canada, representing an increase of more than 10 percentage points from the first quarter and a 19.1 percentage point increase from last year.

The increases were more pronounced in high-priced markets in Toronto and Vancouver, where mortgage servicing costs require 91% and 96.9% of the average household income, respectively. Accordingly, 40% of Canadians are concerned they have too much debt, leading to increased borrowing costs since the beginning of the year, as the Bank of Canada raised the overnight target interest rate to 2.50%. This has led to higher interest rates for mortgage holders and those with lines of credit. Meanwhile, fixed mortgage rates have also risen, with average discount rates increasing from 1.52% in March to nearly 4.50% today.

As a result, Canadians are scrutinizing their current debt burdens closely, with over 40% confirming they have too much, according to new Angus Reid survey data. However, the majority (58%) believe their debt levels are under control. Regionally, Quebec residents are the most likely to be confident about their debt levels (69%), followed by those in British Columbia.