Higher interest rates take a bite out of housing affordability

The little bit of housing affordability relief that Canadian homebuyers enjoyed in late 2017 slipped away in the first quarter of 2018, according to the latest Housing Trends and Affordability Report, issued July 3 by RBC Economic Research.

An average Canadian household needed to allocate 48.4 per cent of their income to carry the costs of owning a home purchased in the first quarter. That 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.

“Higher mortgage rates were the main contributor to the rise in ownership costs,” said Craig Wright, RBC senior vice-president and chief economist. “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.”

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 of this year, as housing prices remained flat overall in Canada.

Nonetheless, in Toronto, home prices fell again in the latest period and enough so to counter the impact of rising interest rates. Housing affordability, therefore, improved for the second-straight quarter in the area, with RBC’s aggregate measure easing very slightly by 0.1 percentage points to 74.2 per cent. Toronto was, in fact, one of only two markets tracked by RBC Economic Research that recorded a decline. Winnipeg was the other. While encouraging, the Toronto region still has a long way to go before homebuyers feel any meaningful relief.

Vancouver home ownership costs reached their highest levels on record in the first quarter of 2018—considered by many to be at crisis levels. Besides the high-interest rates that have impacted a number of cities across CanadaVancouver has also faced a re-acceleration in home prices, causing further material deterioration to affordability. The RBC aggregate affordability measure jumped to 87.8 per cent in Vancouver, up 1.5 percentage points.

Elsewhere in Canada, rising interest rates caused affordability to erode modestly in the majority of markets. The quarterly increase in RBC’s aggregate measure in Saskatoon, Ottawa, Halifax and St. John’s was the largest in more than a year. Further, Montreal faced a third-straight rise in its measure, reaching its highest point since 2011.

“Interest rates will be crucial to the outlook for housing affordability in the year ahead,” said 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 per cent currently to 2.25 per cent in the first half of 2019. This would have the potential to stress housing affordability significantly.”


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