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Housing market affordability

Despite minor improvement, housing affordability remains near all-time worst level: RBC

Despite a rise in average home prices earlier in the year, strong income gains were enough to improve affordability in the second quarter, albeit only slightly.

That’s according to RBC’s aggregate housing affordability measure, which fell by 0.3% to 59.5%. This means it takes 59.5% of the average household income to cover home ownership costs, down only slightly from the all-time high of 61.2% reached in Q3 2022.

The drop was due to a 1.4% quarter-over-quarter rise in household income, which was enough to lower the ratio of ownership costs to median household income.

Even so, report author Robert Hogue notes that the slight improvement won’t make any meaningful difference for homebuyers as mortgage payments continue to rise due to higher prices during the quarter and interest rates at record highs.

But not all regions saw affordability measures move in the right direction. The situation continued to deteriorate in Vancouver and Toronto, where it takes 97.5% and 79.6%, respectively, of a household income to cover ownership costs.

“While cooler resale activity and a re-balancing of demand-supply conditions are likely to temper price appreciation in most of Canada in the near term, high interest rates will keep the bar elevated for buyers,” Hogue noted.

“We think it will take material interest rate cuts to get ownership costs on a distinctly more affordable track.”

And based on RBC’s latest forecasts, rate cuts by the Bank of Canada aren’t expected until mid-2024 at the earliest.

Housing affordability expected to get worse before it improves

RBC said it expects affordability to erode in the third quarter as income improvements won’t be enough to offset the higher carrying costs resulting from higher rates.

Relief for buyers isn’t expected until 2024 when prices and rates are likely to stabilize, RBC says, adding that the anticipated start of the Bank of Canada’s rate cuts by the second half of the year will also help.

“Buyers will continue to contend with extremely difficult affordability conditions in the meantime in many of Canada’s large markets,” Hogue says, adding that housing resale demand will remain muted as a result, particularly in Toronto and Vancouver where buyers are “entirely priced out.”

“Giant leaps” needed in building supply

But despite any incremental improvements that may materialize over the coming year, Hogue says it will take years and “concerted efforts” to fully restore housing affordability in Canada.

“Supply must increase by giant leaps to make a material difference,” he said. “But building new homes takes a long time—up to several years in the case of large condo apartment complexes. And it’s increasingly hard to build units ordinary Canadians can afford to buy given soaring construction costs and finite construction capacity.”

In a report released recently, the Canada Mortgage and Housing Corporation (CMHC) said that in order to adequately meet demand, 3.5 million additional housing units need to be built on top of the 2.3 million units that are currently on track to be completed by 2030.

While the housing supply forecast has improved slightly in Ontario, it worsened in provinces like Quebec, Alberta and British Columbia.