Can your client afford a home in 2019?

Clients looking to buy a home in 2019 likely won’t catch a break when it comes to affordability.

Interest rate hikes in the new year are expected to keep upward pressure on homeownership costs, says an RBC report on housing trends and affordability. Mortgage rates have increased for five consecutive quarters, and account for the entire increase in RBC’s aggregate measure of Canadian housing affordability over that period.

In the third quarter, the bank’s affordability measure deteriorated to its worse level since 1990. In Q3, about 54% of a typical Canadian household’s income was required to carry ownership costs of the average home ($567,600), says the report. The measure is up 1.5% from a year ago. (Carrying costs include principal and interest, property taxes and utilities.)

In Vancouver, the measure is about 87%; in Toronto, 75%; in Montreal, 45%; in Calgary, 43%; and in Ottawa, 39%.

Quarter over quarter, RBC’s measure of affordability increased the most in Montreal—one of the stronger markets in Canada in the past year, along with Ottawa, says the report.

The report also notes that clients’ incomes must be substantially higher relative to previous years to qualify to buy a home in accordance with the new mortgage stress test introduced in 2018.

The income necessary to cover ownership costs and clear the mortgage stress test was $114,000 in Q3, assuming a 25% down payment on an average home, says the report. That’s up from $74,000 three years ago.

In Vancouver, the qualifying income rises to $211,000; in Toronto, to $167,000.

Price increases account for a big part of the increase in qualifying incomes, says the report, adding between $27,000 (Toronto) and $34,000 (Vancouver) over the last three years. The stress test raised qualifying incomes by similar amounts, it says, noting that the impact is felt countrywide.

While many potential homebuyers look to more affordable condos, the resulting increased demand is eroding condo affordability—a Catch-22 for buyers, says the report.

Read: Alternative mortgage lenders could become a risk

While clients shouldn’t expect a break on affordability in 2019 with two rate hikes expected from the Bank of Canada, RBC says affordability likely won’t erode significantly, either.

“Softening prices in key markets and rising household income increases will provide some offset,” says the report.

Those key markets are Vancouver and Toronto, where continued price adjustments are expected, as outlined in a CIBC report earlier this week.

For full details by city, read the RBC housing report.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.