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Calculating housing affordability

As homeownership costs hit a new high, RBC predicts affordability challenges for years to come

Housing affordability in most major markets continued to worsen in the fourth quarter despite a slight easing of home prices.

And despite some relief that’s expected if the Bank of Canada begins cutting interest rates later this year, RBC Economics predicts it will take “many years” before borrowers see any meaningful improvement to housing affordability.

For a household earning a median income, it now takes a “staggering” 63.5% of that income to cover the costs associated with owning an average home, according to the latest data from RBC Economics. That’s up from 61.3% in the previous quarter.

It also found that the monthly mortgage payment—for an average-priced home of $796,300 in the country’s key housing markets—rose by 3.3%, or more than $125, to an average of $3,990.

RBC noted that the biggest deterioration in affordability was seen in the highest-priced markets of Vancouver, Victoria and Toronto, while “the situation also became more challenging” in Ottawa, Montreal and Halifax.

Expected Bank of Canada rate cuts to help, but not right away

The report’s author, RBC economist Robert Hogue, said cuts to the Bank of Canada’s overnight rate that are expected later this year will be a “turning point” for affordability.

“We expect lower borrowing costs will restore some of the massive losses during the pandemic,” he wrote. “Any improvement over the coming year, though, is poised to be modest and leave budget-constrained buyers wanting.”

And while he says the outlook will brighten once we get into 2025 as borrowers benefit from additional BoC rate cuts, the improvement still won’t make up for the deterioration in affordability lost during the pandemic when house prices soared to record heights.

“Under our base case scenario, the share of an average household income needed to cover ownership costs would only fall to mid-2022 levels by 2025,” Hogue noted. “That would scarcely lower the bar for most potential buyers.”

Instead, more meaningful improvements to affordability “will likely take years” in most of Canada’s major markets, he adds.

“In this context, we expect the housing market’s recovery to be slow at first, before gaining momentum as interest rate cuts accumulate,” he said.