Housing mania drives RBC’s affordability measure to its worst level in 31 years
by Laura Forester | June 30, 2021
Canada’s housing market continued to heat up in the early months of 2021, as the buying frenzy reached never-before-seen levels. This attendant rise in ownership costs far exceeded buyers’ income gains in the first quarter of 2021.
The ratio of ownership costs to household income— which constitutes RBC’s affordability measure—jumped 0.9% overall in Canada to 52.0%.
According to Robert Hogue, Senior Economist at RBC and the report author, a rise in the affordability measure represents a deterioration in affordability and this increase represents levels that have not been reached since 1990.
Ownership costs are an excessively heavy burden in Vancouver, Toronto and Victoria, and increasingly so in Montreal and Ottawa. There were a few markets in the Prairies and New Brunswick that managed to buck the trend last quarter.
More people want a single-family home, fewer can afford it
Surging demand for properties with larger living spaces continued to crank up single-family home prices and ultimately ownership costs. RBC’s measure for single-detached homes surged 1.2 percentage points to 56.8% in the first quarter.
Things got slightly better for condo apartments, however, with the measure easing 0.6 percentage points to 38.2%. This reflected condo price declines in several major markets.
Situation to get more challenging in the near term
The tight demand-supply conditions maintain intense upward pressure on home prices. This is poised to raise the ownership bar higher-still for buyers in most markets, including smaller cities and rural areas that have attracted a lot of interest during the pandemic.
In big cities, the affordability of condo apartments—the more viable option for many buyers—will likely erode as prices have recently begun to firm up.
About the RBC Housing Affordability Measure
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 and condo apartments, as well as for an overall aggregate of all housing types in a given market.
Current home prices are sourced from RPS Real Property Solutions, and established from sales prices from monthly transactions, which are filtered to remove extreme values and other outliers.
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 basis for 14 major urban markets in Canada and a national composite.
The higher the measure, the more difficult it is to afford a home. For example, an affordability measure of 50% means that home ownership costs, including mortgage payments, utilities, and property taxes take up 50% of a typical household’s pre-tax income.