Click here to join our mailing list to receive the latest news and updates as they happen. Unsubscribe any time.
Calculating housing affordability

Housing affordability eased slightly in Q1, but “incredibly challenging” conditions persist: RBC

The Bank of Canada’s temporary rate pause in the first half of the year helped ease affordability in the first quarter, but only nominally.

That’s according to RBC’s aggregate affordability measure, which eased by 1.6 percentage points to 59.5%. This marked the first decline in the index in nearly three years.

“The Bank of Canada’s (now temporary) pause following January’s rate announcement finally gave homebuyers some breathing room,” RBC noted in its report. “The policy shift helped stabilize mortgage rates, allowing the price correction to lower ownership costs associated with a home purchase in the first quarter of 2023.

RBC said the central bank’s rapid interest rate hikes in the previous two quarters “overwhelmed any benefits arising from declining prices.”

While Vancouver, Victoria and Toronto saw the largest improvements in affordability measures in the quarter, they remain the country’s least affordable markets.

The RBC housing affordability measure shows the proportion of median pre-tax household income that would be required to cover mortgage payments, property taxes and utilities based on the benchmark market price for all housing types.

While the national average stood at 59.5% in the first quarter—well above its 38-year average of 40.1%—the measures were highest in Vancouver (96.1%), Toronto (79%) and Victoria (73.5%).

“While welcome, the easing in ownership costs barely makes a dent in reversing the enormous loss of affordability since mid-2020,” the RBC report notes. “Big picture, owning a home is still a huge (if not impossible) stretch for middle-income households in Vancouver, Victoria and Toronto, and Montreal, Ottawa and Halifax to a lesser degree. Buyers in all markets we track face a significantly worse situation than they did a year ago.”

Affordability faces headwinds from further rate hikes and home price rebound

Despite the modest improvement in Q1, RBC says reversing the loss of affordability will be a “long process,” particularly with prices back on the upswing since January.

While average home prices were on the decline for most of 2022, they’ve since rebounded, having risen by over $116,000 since January of this year, according to data from the Canadian Real Estate Association.

RBC says it’s been surprised by how quickly prices have started to rebound, as it initially thought upward price pressure wouldn’t return until the fall. As a result, it said the increase in property values could stall or even reverse the improvement in affordability.

Another wildcard has been the Bank of Canada’s surprise quarter-point June rate hike and the fact markets anticipate another at either the Bank’s upcoming July or September meetings, which would bring its benchmark lending rate to 5%.

“At this point, we think our forecast for a terminal policy rate of 5.0% won’t exacerbate the situation,” RBC notes. “In fact, we believe it would restrain the rebound in demand and moderate price increases—thus keeping affordability on an improving track over the coming year.”

However, any further rate hikes above 5% “would likely put affordability on a more challenging course,” it added.