Break on affordability will likely be short-lived: RBC

Saturday, September 30th, 2017

Not only are prices on the rise again, but interest rates have begun to climb as well.

The Vancouver Sun

Housing affordability in Canada hit the worst level in 27 years in the second quarter of this year, according to a Royal Bank of Canada report.

RBC Economics said in a report Friday that its housing affordability measure for Canada deteriorated for the eighth straight quarter.

The least-affordable place to purchase a home remains the Vancouver area, where affordability worsened after two straight quarters of improvement but remains better than a year ago. Outside of British Columbia and Ontario, affordability remains mostly stable, RBC said.

RBC’s housing affordability measure shows the proportion of median pre-tax household income required to service the costs of owning the average home — factoring in both condos and singlefamily detached homes — including mortgage payments, property taxes and utilities.

“Clearly, home ownership remains out of reach for many would-be buyers in the area,” RBC’s report says. “The good news is that some relief is on the way. Recent downward pressure on prices is poised to lower ownership costs in the period ahead. The bad news, unfortunately, is that rising interest rates will take some of that relief away.”

The Toronto area was the hardest hit. RBC says affordability declined the most compared to the previous year and hit the worst level ever measured in the city.

The Ontario government’s actions in April to cool down the housing market, including a foreign buyers tax, did not have an immediate impact on provincial housing prices in the second quarter, RBC said.

The Vancouver area was the least affordable in the latest quarter, ended June 30 at 80.7 per cent, down 2.4 percentage points yearon-year. However, RBC says prices have already begun to climb, which means “the window for a meaningful improvement in affordability in the Vancouver area likely has closed for now.”

The report warns this affordability relief for Vancouver “may well be temporary. Not only are prices on the rise again, but interest rates have begun to climb as well.”

The Toronto area was secondhighest year-over-year at 75.4 per cent, marking an increase of 12.7 points. Victoria came in third at 58.6 per cent, with a year-on-year increase of 7.3 points. Across Canada, RBC’s housing affordability measure hit 46.7 per cent in the latest quarter, a level not seen since the end of 1990 and a jump of 3.7 points from a year earlier.

Affordability in Edmonton worsened slightly year-on-year to hit 30.3 per cent. In Calgary, however, affordability deteriorated by 1.5 points year-on-year to 39.2 per cent.

Rising interest rates will further weigh on Canadians’ ability to afford a home, RBC said. After rate hikes in June and September, RBC’s economists expect the Bank of Canada to raise its overnight rate one more time before yearend and three times in 2018 for a total increase of 100 basis points.

RBC Economics estimates that, everything else remaining constant, a 100-basis-point increase in mortgage rates would worsen RBC’s national housing affordability measure by roughly 3.5 percentage points. Canada’s most expensive housing markets would be hit harder, RBC adds, noting Vancouver would see an almost seven-point increase.

“This would occur at a time when housing affordability is already stretched in some of Canada’s largest markets,” the report says.

“While high sensitivity to a rise in interest rates highlights material vulnerability, the reality is bound to be less threatening as other factors such as income gains will mitigate at least of part of the impact.”

© 2017 Postmedia Network Inc.

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