[RBC] Ownership Costs Rise Due to Higher Mortgage Rates
by Yvonne von Jena | July 3, 2018
According to RBC’s latest Housing Trends and Affordability report, the little bit of housing affordability relief that Canadian homebuyers enjoyed in late 2017 slipped away in the first quarter of 2018. Further, RBC expects further rate hikes between now and the first quarter of 2019, which has the potential to stress housing affordability significantly going forward.
The RBC Housing Affordability measure shows 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 a certain housing type in a given market. For house prices, it sources the RPS HPI.
According to RBC, an average Canadian household needed to allocate 48.4% of their income to carry the costs of owning a home purchased in the first quarter. This was a multi-decade high and represented a 0.4 percentage points increase relative to the previous quarter. A rise in the measure constitutes a loss of affordability. The following chart shows the RBC Housing Affordability Measure for Canada by property type:
“Higher mortgage rates were the main contributor to the rise in ownership costs,” said Craig Wright, Senior Vice-President and Chief Economist at RBC. “With the prospect of more interest rate hikes in the period ahead, there’s a definite risk that affordability will erode further in the coming year. The odds of this occurring will also depend on the degree to which household income increases.”
“Interest rates will be crucial to the outlook for housing affordability in the year ahead,” continued Craig Wright. “Our view is that the Bank of Canada will proceed with a series of rate hikes that will raise its overnight rate from 1.25% currently to 2.25% in the first half of 2019. This would have the potential to stress housing affordability significantly.”
While it was the third-straight time mortgage rates increased, a drop in home prices (centred in the Toronto region) more than offset their effect on affordability in the previous quarter. This was not the case in the first quarter, as housing prices remained flat overall in Canada.