There appears to be little relief in sight for Canadian homebuyers, especially first-time buyers, as affordability is likely to worsen.
A report published Tuesday by RBC Economics says that rising interest rates took a bite out of housing affordability in the first quarter of 2018 and things are not looking brighter for the near future.
Average Canadian households had to allocate 48.4% of their income to housing costs in the first quarter, a rise of 0.4 percentage points from Q4 2017 and a new multi-decade high.
“Higher mortgage rates were the main contributor to the rise in ownership costs,” said Craig Wright, Senior Vice-President and Chief Economist at RBC. “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.”
RBC Economics’ Housing Trends and Affordability Report reveals that things had improved in the fourth quarter of 2017 as easing home prices helped offset rising interest rates. But nationwide prices were flat at the start of 2018.
Affordability improved in Toronto, slightly
Toronto did see some improvement with prices declining in Q1 2018. However, the 0.1 percentage point improvement in the housing affordability measure still means households needed 74.2% of their income for housing costs.
There was also an improvement in affordability in Winnipeg, while the quarterly increase in RBC’s aggregate measure in Saskatoon, Ottawa, Halifax and St. John’s was the largest in more than a year.
Montreal faced a third-straight rise in its measure, reaching its highest point since 2011.
Vancouver continues to push household budgets to the limit with homeowners needing to allocate an eyewatering 87.8% of their income to housing costs following a rise of 1.5 percentage points.
Interest rates to hit 2.25%
“Interest rates will be crucial to the outlook for housing affordability in the year ahead,” continued Craig 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% currently to 2.25% in the first half of 2019. This would have the potential to stress housing affordability significantly.”