[RBC] Housing Affordability Strains Intensified

by Yvonne von Jena | September 29, 2017

According to RBC’s latest Housing Trends and Affordability report, policy actions had not yet curbed Toronto’s escalating prices in the second quarter of 2017, while ownership costs in Vancouver are on the rise again after back-to-back declines. As a result and overall, Canadian housing affordability eroded for an eight consecutive quarter to reach worst level since 1990.

Housing Affordability

The RBC Housing Affordability Measures show the proportion of median pre-tax household income that would be required 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, condo apartments, as well as for an overall aggregate of all housing types in a given market. It sources current house prices from RPS. Here is a chart that shows the RBC Housing Affordability Measure for Canada by property type:

Summary Overview

Here is a summary of key insights from the report:

  • RBC’s housing affordability measure eroded in Canada to its worst level since the end of 1990.
  • The Toronto area experienced the biggest deterioration among the local markets tracked by RBC. Says RBC, its affordability measure for Toronto has never been this poor in Toronto, and these concerning trends are still front and centre.
  • In the Vancouver area, home ownership costs rose again after declining in the previous two quarters. In other words, any relief from government policies came to a quick end in the second quarter.
  • Victoria also saw significant erosion, extending a year-long trend and putting it well on Vancouver’s trail.
  • Affordability pressures generally were in line with long-run averages outside Ontario and British Columbia.
  • Rising interest rates are poised to weigh on home ownership costs across Canada in the period ahead.
  • Affordability in high-priced markets will be most sensitive to interest rate hikes and weigh on affordability.

Rising Interest Rates

Says RBC, the days of ultra-low interest rates in Canada are over. This was made clear by back-to-back increases in the overnight rate by the Bank of Canada in June and September.

These increases are just the beginning of a hiking campaign. RBC expects that the Bank of Canada will raise its overnight rate one more time before year-end and three times in 2018 for a total increase of 100 basis points. RBC also expects longer-term rates to follow suit. Further, it notes that mortgage rates are already on the move and will continue to track an upward trajectory.

Rising interest rates could have significant implications for housing affordability in Canada. The bank estimates that, everything else remaining constant, a 100 basis point increase in mortgage rates would lift RBC’s aggregate measure for Canada by approximately 3.5 percentage points.

All markets would be affected but the effect would be most substantial in high-priced markets—almost 7 percentage points in the case of Vancouver.

Adding to the risk, the rate increases will occur at a time when housing affordability is already stretched in some of Canada’s largest markets. While high sensitivity to a rise in interest rates highlights material vulnerability, RBC says that the reality is bound to be less threatening as other factors such as income gains will mitigate at least of part of the impact.