Canadians face years of challenging conditions without a supply boost or price crash
Millions of Canadians want to achieve their dream of homeownership, but affordability remains out of reach for many, and changing that will be a slow journey according to RBC.
In a thought leadership piece, the big six bank’s assistant chief economist Robert Hogue highlights a second consecutive quarterly improvement in RBC’s aggregate home affordability measure. It fell 0.3 percentage points to 59.3% as household income increased by 1.4% quarter-over-quarter but mortgage payments increased.
“The effect of growing income on affordability is most often obscured by swings in home prices and interest rates, which tend to move ownership costs in larger increments,” Hogue wrote.
RBC’s affordability measure means that a median-income household would need to commit 59.3% of its income to cover home ownership costs and, while the national stat is high, this rises to 79.6% in Toronto and an eyewatering 97.5% in Vancouver.
While many Canadian cities have some of the all-time worse levels by this metric, there was some limited improvement especially in central and Atlantic Canada as home resales cooled, and this may extend to most other markets in time.
But overall, Hogue says that it will take material interest rate cuts to have any real impact on affordability and, as he notes, the Bank of Canada is unlikely to start easing back from current elevated rates while inflation is still not tamed. A rate cut is not expected until at least mid-2024.
A recent report from Royal LePage found that buyers are teaming up with friends and family to get on the housing ladder.
Worse to come
“Odds are income will take a back seat again in the period ahead amid higher mortgage rates and appreciating prices. Housing affordability looks set to erode in Canada in the third quarter, unfortunately,” said Hogue, who sees things improving in 2024.
Affordability in the hottest markets is likely to keep buyers on the sidelines for the foreseeable future though and this could spread beyond Vancouver and Toronto, while the Prairies may not see sales constrained in this way due to higher buyer sentiment so far.
But overall, things are not set to show a widespread and meaningful improvement for those who want to buy a home of their own.
“Short of a housing crash that would destroy property values or an unexpected about-face in monetary policy, any progress in restoring housing affordability is likely to be slow,” added Hogue.
As many commentators have been saying for years, greater supply is the key to boosting housing affordability and this will require multi-level governmental efforts to remove barriers to homebuilding.