Housing affordability in Canada was at its worst level in 31 years at the end of 2021, according to RBC Economics, which is warning that there’s no relief in sight for the country’s already-stretched homeowners.
Almost half of median pre-tax household income (49.7 per cent) would have been required to cover mortgage payments and other costs tied to owning a home, on an aggregate basis, in Canada in the fourth quarter of last year. That was an increase of 7.5 per cent from a year earlier and almost nine percentage points higher than the average since 1985, according to a report released Wednesday.
Affordability was even more daunting for the owners of single-detached homes, which RBC estimates would have chewed up 54.6 per cent of median pre-tax household income. `
"Rapid price escalation in the early months of 2022 has already raised the bar to impossible levels for many homebuyers," wrote RBC Assistant Chief Economist Robert Hogue in the report.
"And with the Bank of Canada now in the process of hiking interest rates materially—we expect a total increase of at least 150 basis points in the coming year—ownership costs look set to spiral even higher. Worst-ever affordability levels could well ensue, putting buyers in a precarious spot."
It's the second time in as many days that an economist from one of the Big Five banks has sounded the alarm on Canada’s housing markets.
Robert Kavcic from BMO Capital Markets wrote in a report to clients Tuesday that he thinks there is a "full-scale attack on Canadian home prices" as interest rates rise and amid tax interventions by the Nova Scotia and Ontario governments.
Kavcic said in an interview Wednesday there is "real fundamental strength" driving up home prices, but the magnitude of the surge — which sent the Canadian Real Estate Association's home price index up by a record 28 per cent year-over-year in January — convinced him there is "quite a bit of froth" built on top of the basic supply and demand dynamics that are at play.
Similarly, RBC's Hogue acknowledged in his report that there are some "good reasons" why home prices have climbed, but that "the extent to which prices have appreciated clearly went beyond what solid fundamentals would suggest in many parts of the country."
Among the markets tracked by RBC, homeowners in Vancouver face the most challenging conditions, with 73.9 per cent of household income going toward servicing ownership costs in the fourth quarter, up nine per cent from a year earlier, at an aggregate level. Digging a little deeper, RBC estimates 99.7 per cent of household income would have gone toward ownership costs for a single-family detached home in Vancouver in the quarter.
The most affordable market in the country was St. John's, where RBC's aggregate affordability measure inched up 1.2 per cent from a year earlier to hit 21.8 per cent in the final three months of last year. And even though the affordability measure for Halifax was just 32.5 per cent in the quarter, Hogue wrote in his report that "affordability is under siege" in the city, which he said might be the country's hottest housing market.
The outlook for affordability is looking increasingly challenging as the Bank of Canada takes aim at inflation. Hogue cautioned in his report that homebuyers are more sensitive to rate increases than they were previously. And he estimated that if the Bank of Canada raises its main policy rate by one and a half percentage points, as RBC expects, it would drive up the housing affordability measure by more than seven percentage points.
"While income gains will provide a partial offset, it’s entirely possible RBC’s measure could spike to all-time highs in the year ahead,” he wrote.
“A shock of this magnitude would severely stress homebuyers and exert significant downward pressure on demand.”