[RBC] Rising Rates keep Squeezing Home Affordability

by Yvonne von Jena | September 28, 2018

According to RBC’s latest Housing Trends and Affordability report, its affordability measure, home ownership costs continued to deteriorate due to higher mortgage rates. Mortgage rates increased each of the past four quarters, and have accounted for the entire rise in RBC’s aggregate measure for Canada over that period. According to RBC, Canadian housing affordability is now at its worst level since 1990.

  • The national number: On a national level, RBC’s aggregate measure jumped by 10 percentage points to 53.9%, up significantly from 43.2% just three years ago (a rise in the measure represents a loss of affordability).
  • Select high-priced markets: “Unaffordability is off the charts in Vancouver, Toronto and now Victoria” says RBC, as interest rates have a big impact in these high-priced markets.
  • Other markets: The situation is much less strained in other markets, although affordability deteriorated in all markets in Canada in the past year.

What to Expect Going Forward

RBC also expects that housing affordability will probably get worse. “The grim outlook for prospective home-buyers will likely continue in the near term,” said Craig Wright, Senior Vice-President and Chief Economist at RBC. “We anticipate the Bank of Canada will proceed with further interest rate hikes well into 2019. This will keep mortgage rates under upward pressure and boost ownership costs even more across Canada.” However, the bank does expect that household income increases will somewhat soften the blow for buyers.

The RBC Housing Affordability Measure

The RBC Housing Affordability measure is calculated as a share of household income, and shows the proportion of required income to service the cost of mortgage payments (principal and interest), property taxes, and utilities based on the average market price for a certain housing type in a given market. A higher number means that buying a home is less affordable. For house prices, it sources the RPS HPI. 

Higher Interest Rates and Borrowing Costs

A lift in borrowing costs accounted for virtually the entire 2.6 percentage-point increase in RBC’s measure in the past year and most of the 1.1 percentage point advance in the second quarter of 2018. Add the stress test on top of this and the picture gets even more daunting for many Canadian buyers, according to RBC.

The percentage share of income a household would need to cover ownership costs by highest to lowest for some of the major cities, are as follows:

  • Vancouver – 88.4%
  • Toronto – 75.9%
  • Montreal – 44.1%
  • Calgary – 43.9%
  • Ottawa - 38.6%
  • Edmonton – 28.4%

“The prospect of further rate hikes doesn’t bode well for Toronto or Vancouver buyers, whether they’re on the look-out for a condo or a single detached home,” said Mr. Wright. “Affordability pressures are likely to become an even bigger issue for them, which we believe will limit how much home resale activity will rebound from its recent cyclical low.”