Homes in Canada became less affordable in Q1 2018, due largely to higher mortgage rates and rising interest rates, says a report by RBC Economic Research.
Based on activity in the first quarter, the bank’s Housing Trends and Affordability Report says the average Canadian household must now allocate 48.4% of its income to carry the costs of owning a home. That’s a 0.4 percentage point increase relative to the previous quarter, and a multi-year high, says RBC in a release.
The report calculates what the bank calls its housing affordability measure, which shows “the proportion of median pre-tax household income that would be needed to service the cost of mortgage payments (principal and interest), property taxes and utilities based on the average market price for single-family detached homes and condo apartments, as well as for an overall aggregate of all housing types in a given market”, the report says.
Affordability breakdown, by city
Even though Canadian housing prices were flat overall in Q1, RBC says in its release, the costs of owning a home in Vancouver reached its highest level on record.
RBC’s aggregate measure for that city rose to 87.8%, an increase of 1.5% over the previous quarter. Higher interest rates and the re-acceleration in home prices caused a “further material deterioration to affordability,” the bank says.
Ottawa, Halifax, St. John’s and Saskatoon all had their housing aggregate measures rise significantly year over year, due to higher interest rates.
Montreal also saw its measure rise, leading to reduced affordability for a third-straight quarter. The share of household income needed to carry a home in Montreal reached 43.7%, its highest level since 2011.
Meanwhile, housing affordability in Toronto improved, with its aggregate measure easing very slightly by 0.1 percentage points to 74.2%. However, the share of household income needed to cover the costs of home ownership rose year over year by nearly 2%, and the report says lack of affordability “poses a tremendous challenge for many Toronto-area buyers.”
Also, “The scope for further relief is limited […],” the report adds, saying, “Home prices [for Toronto] are poised to turn slightly higher near-term after declining modestly in the past two quarters. Prices will get support from balanced demand-supply conditions, which will prevail despite much cooler resale activity.”
RBC says Winnipeg was the only other housing market to become slightly more affordable in Q1. The bank says there’s been “significant slowing in market activity in the past two quarters” in that city, leading to a measure of 29.9%—that 0.2% lower compared to the previous quarter, but 0.8% higher year over year.
What’s next for Bank of Canada?
By the middle of 2019, RBC forecasts that the Bank of Canada will have raised interest rates to 2.25%, up from 1.25% currently. This would make it more challenging to own a home, the report says.
“With the prospect of more interest rate hikes in the period ahead, there’s a definite risk that affordability will erode further in the coming year,” said Craig Wright, senior vice-president and chief economist at RBC, in the release. The odds of this occurring will also depend on the degree to which household income increases.”
The report notes mortgage rate hikes are also a key factor. “We estimate that, everything else remaining constant, a 100-basis-point increase in mortgage rates would lift RBC’s aggregate affordability measure for Canada by about [four] percentage points,” it says.
While cooler housing markets and “a levelling-off of property values in some areas” could help alleviate pressure, the bank says it doesn’t “expect affordability conditions to get any easier in Canada in the period ahead. At best they will remain unchanged. Most likely, though, they will become more challenging.”
Read the full report here.