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[RBC] Softer housing market in Canada provides some affordability relief

by Joel Bates | March 29, 2019


According to RBC’s latest Housing Trends and Affordability Report, powered in part by Real Property Solutions (RPS) Home Price Index, home ownership costs have started to dip almost everywhere in Canada. An easing in property values, offset slightly by higher interest rates, brought most of the affordability relief with the first home price decline in some time.

  • The national number: On a national level, RBC’s Housing Affordability Aggregate Measure dropped to 51.9% in Q4 of 2018, down slightly from 53.9% in Q3 (a decrease in the measure represents an increase of affordability). This is still up from 48.3% in Q4 of 2017 and the generalized improvement does not really change the big picture as the affordability strain persists.
  • Select high-priced markets: The fourth-quarter relief barely made a dent in Vancouver, which is down 2.2% to 84.7%, and Toronto where the largest drop of 9.2% brought the affordability measure to 66.1%. However, affordability is still at crisis levels in these markets and pressure is starting to intensify in Montreal.
  • Condo markets: Over the past year, RBC’s affordability measure for condos in Canada increased by 2.8 percentage points compared to only 0.9 percentage points for single-detached homes. The deterioration of condo ownership affordability really jumps out when compared to renting an apartment, normally a reasonably close substitute; for example, condo buyers in Vancouver and Toronto are paying a premium of more than $900 per month relative to renting.

The RBC Housing Affordability Measure

The RBC Housing Affordability Measure shows the proportion of household income required 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. Current home prices are sourced from the RPS House Price Index. The affordability measures are based on a 25% down payment, a 25-year mortgage loan at a five-year fixed rate and are estimated on a quarterly bases for 14 major urban markets and a national composite.

 

Generalized improvement doesn’t really change the big picture – affordability measures remain close to record-high levels

Buying a home in Vancouver, Toronto, Victoria and increasingly Montreal is still a stretch for ordinary Canadians despite all four markets seeing some degree of improvement in the fourth quarter. The national measure shows a similar picture, yet some markets boast affordability levels that are within historical norms. The percentage share of income a household would need to cover ownership costs by highest to lowest for some of the major cities, with the most significant reduction for Toronto and increase in Edmonton since December 2018, are as follows:

 

What to expect going forward

The outlook for housing affordability has brightened somewhat. RBC has lowered its profile for interest rates and now expect home prices to be flat from an overall level in Canada this year – with further price declines likely in Vancouver and Alberta. With the tight labour market poised to keep household income growing, the stars may be aligned for more affordability relief in the period ahead.

 

For the full RBC Housing Trends and Affordability Report click here and for the methodology and previous reports click here.

For the recent public release of the RPS House Price Index (HPI) click here and for the comprehensive package for lenders click here.


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