Surging interest rates have driven home ownership costs to record-high levels, says RBC Economics in its latest Housing Affordability report.
The Bank of Canada’s rate hiking campaign since March has added hundreds of dollars to mortgage payments that come with a home purchase. This, along with the jump in property values during the pandemic have made it more difficult than ever to become a homeowner in Canada. RBC’s national aggregate affordability measure reached 60% in the second quarter, surpassing the previous worst-ever point (57%) in 1990, explained the report.
“The spike in interest rates since March—the policy rate is up 300 basis points to date with another 75 basis points on the way by year-end in our opinion—is raising ownership costs in every corner of the country. Most affected are expensive markets where affordability was already stretched before the Bank of Canada launched its attack on decades-high inflation,” said the report.
“So far the impact has been historic. RBC’s aggregate affordability measure was thrusted into record-high territory nationally (to 60.0%) and in Victoria (67.6%), Vancouver (90.2%) and Toronto (83.0%) in the second quarter of 2022. Smaller markets in Ontario (including Hamilton, London, St. Catharines, Kitchener-Waterloo-Cambridge and Windsor) and British Columbia (including Kelowna) also reached their worst affordability levels ever based on the ratio of mortgage carrying costs to household income. Ottawa (RBC aggregate affordability measure of 48.5%) and Halifax (41.3%) hit their previous high-water mark. While the situation isn’t as dire in other regions of the country—in fact, many markets in Alberta and Saskatchewan, and some in Atlantic Canada still look reasonably affordable—the rapidly deteriorating trend is universal. A rise in RBC’s measure represents a loss of affordability.
“Unsurprisingly, soaring ownership costs turned Canada’s housing market on its head. The frenzy that drove resale activity and prices to incredible heights at the start of this year is gone. Many buyers have been forced to the sidelines either because they no longer qualify for a mortgage or have seen their purchasing budget drastically reduced. Home resales have plummeted more than 30% since February and prices are now softening, especially in Ontario and parts of British Columbia.”
RBC said the widespread market downturn is setting the stage for some affordability improvement down the road.
“We expect the softening in prices will continue and spread until a bottom is reached around spring time next year. We think this will lower ownership costs once interest rates stabilize. Our view is unaffordability will peak at the end of this year—though the timing is poised to vary market by market. Growing household income will partly drive the improvement that will follow. It will likely take years to fully reversed the tremendous deterioration that took place since 2021,” it added.
Mario Toneguzzi is a veteran of the media industry for more than 40 years and named in 2021 a Top Ten Business Journalist in the world and only Canadian)
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