Affordability will continue to be an issue in most Canadian real estate markets, according to the latest Housing Trends and Affordability report from RBC Economics.
TL;DR: Affordability issues have reached crisis levels in Toronto and Vancouver, where it takes 86.9% and 75.3% respectively to carry the average home mortgage. In Montreal, affordability issues are also becoming a concern – Montreal’s home prices grew faster than any other Canadian market in the third quarter 2018. Many young buyers are opting for condos as a homeownership alternative.
In the third quarter of 2018, RBC’s Canadian affordability measure plunged to its worst level since 1990. The average Canadian household puts 53.9% of their income to carry the ownership costs of average home bought last quarter. To put this into perspective, banks will usually use a benchmark of 30% to qualify borrowers for a mortgage loan.
Rising interest rates further erode affordability, and mortgage rates have for a fifth straight quarter.
According to RBC’s aggregate measure, affordability is now at crisis levels in Vancouver and Toronto.
Montreal continues to be relatively affordable, but real estate values showed the highest growth rate across Canada in the third quarter last year.
Rising household incomes in key Canadian markets has provided some offset. Nevertheless, stretched affordability conditions in Vancouver (where 86.9% of average income goes towards housing costs) and Toronto (75.3%) makes it nearly impossible for young households to enter the housing markets.
In Vancouver, the income necessary to cover ownership costs and clear the mortgage stress test was $211,000 in the third quarter. This is clearly at the higher end of the income scale.
The qualifying income was $167,000 in Toronto and $154,000 in Victoria.
This year’s stress test placed the bar even higher, requiring borrowers to qualify at a significantly higher interest rate than their offered rate. In Vancouver the stress test added almost $36,000 to the qualifying income needed to buy an average priced home ($1.1 million). In Toronto, it added $27,000 to the qualifying amount (for an average home of $857,000) and $25,000 in Victoria ($813,000).
How are buyers responding to affordability issues?
As single family homes slip out of reach for most Canadian buyers in metropolitan cities, many young families have opted for condo apartments instead.
The increased demand in the condo sector has resulted in higher condo prices, which has caused affordability issues to erode even in this low-cost market. Over the past year, RBC’s affordability measure for condos in Canada increased by 3.6 percentage points compared to only 1.2 percentage points for the single-family detached homes (an increase in the measure represents a loss of affordability).
Condos are still the most affordable housing type in Canada, with a measure of 43.2%. compared to 59.2% for detached homes.
Affordability is likely to continue eroding through 2019
Although Canada’s hottest markets are now starting to cool, 2019 is unlikely to see significant improvements in housing affordability.
RBC expects the Bank of Canada to increase the overnight rate two more times next year, putting further pressure on ownership costs.
However, price are expected to rise at a slower pace than they did in 2017 and 2018.
Is Montreal’s hot market causing affordability issues?
Affordability pressures have been building in both Ottawa and Montreal, where home sales and prices reached record highs in 2018.
Upward pressure on ownership costs are now starting to erode affordability in these markets.
RBC’s aggregate measure reached a 10-year high of 45.2% in the third quarter, following 1% quarterly rise —the largest increase among markets that the report tracked.
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