This year is unlikely to provide substantial housing affordability relief in Canada, reports the latest Housing Trends and Affordability report from RBC Economics.
The Bank of Canada is expected to hike interest rates further this year, which will result in continued upward pressure on ownership costs. However, home prices in several key markets should soften somewhat and household income is expected to climb further, providing some balance.
RBC’s aggregate housing affordability measure rose 1.5 per cent year-over-year to reach 53.9 per cent in Q3-2018, and is now at its worst level in Canada since 1990. The housing affordability measure is calculated as a share of household income. A higher number means buying a home is less affordable.
Higher interest rates are to blame for the entire increase in RBC’s measure in previous years. This, plus the mortgage stress test, are making it more difficult for many Canadians to be able to afford a home.
This year’s stress test, which required mortgage borrowers to qualify at a significantly higher interest rate than their offered rate, required potential home buyers to have access to several thousands of dollars more in income in order to buy a home in every market across the country.
“Buyers in Vancouver, Toronto and Victoria needed between two and three times the median household income to qualify to purchase an average home in the third quarter,” said Craig Wright, senior vice-president and chief economist at RBC, in a press release. “Poor affordability has made it nearly impossible for some buyers – often young households – to enter these housing markets.”
Even more worrying is the degree to which the qualifying income increased over the past three years. For example, the income required to qualify to buy an average home in Vancouver jumped 66 per cent to $84,000. Price appreciation and the stress test accounted for the majority of this increase.
According to RBC Economics, affordability is at crisis levels in Vancouver and Toronto, but eroded most in Montreal in Q3-2018. The significant decline in housing affordability in Canada’s most expensive cities in recent years has led to many buyers shifting their focus to lower-priced housing options, including condos. The resulting increased demand for these lower-priced homes has driven prices higher. RBC’s affordability measure for condos in Canada rose 3.6 per cent in the past year, compared to only 1.2 per cent for single-family detached homes.