Affordability Worsened in Q2 as High Home Prices Persisted, Says RBC
Despite historically low interest rates, housing affordability deteriorated in most of the major markets across Canada in the second quarter, according to a new report from RBC Economics.
RBC’s latest Housing Trends and Affordability report, which measures affordability based on ownership costs as a percentage of household income, rose to a 30-year high in the second quarter.
Nationally, the average homeowner must devote 45.3% of their household income to ownership costs—a 2.7-percentage-point increase from Q1 and the fourth straight quarterly rise.
The largest deterioration in affordability was seen in Vancouver, where 63.5% of household income is needed to cover ownership costs, followed by Toronto (59.1%), Ottawa (38.5%) and Montreal (38.4%).
Despite the national average home price peaking in March (Q1) of this year, prices in the second quarter were still historically high and slightly higher than they are today.
“While Canada’s housing market isn’t as frenzied as it was at the start of this year…it continues to operate at historically strong levels,” wrote RBC economist Robert Hogue, noting that high prices contributed to a generalized deterioration in affordability.
This was especially true in the single-family detached home category, where the affordability measure surged 3 percentage points to 49.7%, well above the long-term average of 43.1%.
“Soaring demand for properties with larger living spaces have lit up single-family home prices during the pandemic,” Hogue wrote. “Owning a condo apartment, on the other hand, continues to be relatively more affordable. RBC’s national condo measure was 32.6% in the second quarter.”
There are also markets where the affordability measure is below their long-term averages, namely those in the Prairies and the Atlantic region. Those markets include Calgary, Edmonton, Regina, Saskatoon, Winnipeg, Saint John, Halifax and St. John’s.
Changes to the methodology
This is the first quarter in which RBC updated its affordability measures. The bank said two key changes were made to the calculation of the measures to provide better representation and weight to the costs associated with homeownership.
“The impact of these changes is significant, altering both levels (downwards) and trends (flatter) of the measures materially,” the report explained.
The analysis is now based on the mortgage rate chartered banks charge on funds advanced for a 5-year fixed mortgage, which “better reflects what borrowers actually pay in the marketplace,” the bank said. RBC’s measures were previously based on the average posted rates, which “had become less representative of contracted rates over the years.”
Looking ahead, Hogue said he expects prices to continue to rise as long as demand-supply conditions remain tight.
“This will further raise ownership costs across a wide spectrum of markets and housing categories,” he wrote. “That said, the affordability deterioration is poised to moderate. The rate of price appreciation is now slowing in many places, and we project prices to flatten in 2022.”