Interest Rate Hikes Eroding Housing Affordability
Housing Trends and Affordability Report
After improving slightly late last year, housing affordability has now reached “crisis levels” in Vancouver and is posing a “tremendous challenge” in Toronto.
That’s the assessment from RBC’s latest Housing Trends and Affordibility report, which says higher interest rates are the main reason for deterioration in affordability right across the country.
“The winning streak for housing affordability in Canada ended,” the report reads, noting the aggregate affordability measure for Canada rose by 0.4 percentage points to 48.4% in Q1. “This rise entirely reversed the slight 0.3 percentage-point decline recorded in the previous quarter – the first decline in 10 quarters.”
Toronto and Vancouver led the way as the country’s least affordable markets
In Vancouver it takes 87.8% of households income to cover the costs of home ownership, the report said, while in Toronto that percentage is 74.2%. Compare that against the national average of 48.4%, or 43.7% in Montreal, 43% in Calgary and just 28% in Edmonton.
Main Factor = Higher Interest Rates
Overall, higher interest rates were cited as the main factor for sending home ownership costs to a multi-decade high, while the situation was amplified in both Vancouver due to a return to appreciating prices.
Housing Prices Could Start To Decline
Given the limited capacity for Vancouver and Toronto home-buyers to put more of their income towards housing than they already are, the National Bank report concluded that prices could start to decline should interest rates continue to increase.
“Since we don’t see how Vancouver and Toronto home-buyers could pay a higher share of their incomes for shelter, a downward adjustment of prices is conceivable,” the authors write. “If our scenario for interest rates out to the end of 2019 materializes (+75 basis point on the 5-year mortgage rate), and assuming historically average income growth, prices would need to fall on the order of 2% to keep home affordability from deteriorating further.”
How Client First Mortgage Solutions Can Help
Owning your own home is an exciting proposition, but before you can know whether home ownership is right for you be sure to talk with one of our experienced Mortgage Advisors. Also be sure to read Can you afford to buy a home? for more helpful information. We look forward to hearing from you.
Original Article – Canadian Mortgage Trends – July 5, 2018
