Canada Makes The 90s Real Estate Bubble Look Like Affordable Housing

Canadian real estate became slightly easier to purchase, according to the country’s largest bank. RBC’s Housing Affordability Index showed a slight improvement in Q1 2023, the first in years. The decline won’t provide much comfort for buyers though, with housing still less affordable than the peak of the 90s bubble. The bank doesn’t see things improving much either, after observing the speed at which buyers are bouncing back. 

Canada Saw The First Improvement In Affordability In 3 Years

The RBC Affordability Index looks at ownership costs for buyers, as a share of the median household income. If the index reads 50%, it means a median household would need to spend 50% of their income to make the mortgage payments. The higher it goes, the worse the indicator.

RBC Housing Affordability Measures – Canada

Ownership costs as % of median household income. 

Source: RBC Economics. 

Canadian residential real estate saw its first affordability improvement in years. The RBC index shows ownership costs fell 1.6 points lower to 59.5% of income in Q1 2023. The decline is the first recorded in 3 years, so it’s a minor win. Very minor. 

Canada’s Real Estate Bubble In The 90s Would Be An Improvement

Canadian debt servicing costs moved in the right direction, but it isn’t much relief. The single quarter drop is from the worst level ever recorded in Canada. It surpassed the peak of the bubble in the 90s. If a country is working towards being as affordable as the peak of the worst bubble recorded, it’s not doing great. 

Keep in mind that RBC is reporting a national number. It’s even more expensive to be located in major cities where the country’s employment is concentrated. 

“Any relief in the first quarter is small comfort for buyers in Vancouver, Toronto and surrounding areas who continue to face sky-high costs,” explains Robert Hogue, RBC’s assistant chief economist. 

Canadian Real Estate Buyers Bounced Back Faster Than Expected

RBC expected home sales to reach a bottom this past Spring, arguing that it can’t fall much lower. However, they weren’t expecting buyers to jump back into the market so fast. Home sales recovered much faster than inventory, launching prices higher in the second quarter. 

“What’s surprising…is how quickly the demand-supply equation has tightened in many parts of Canada (including Ontario and British Columbia) amid strengthening demand and still-low inventories,” he said.  

“We thought it would take until around fall for upward price pressure to build in most markets. Increasing property values could potentially stall or even reverse the improvement in affordability.” 

RBC Doesn’t See Housing Affordability Improving Much

Renewed activity has the bank adjusting expectations, warning the country has a long way to go. They see the combination of rising prices and rates limiting any affordability improvements in the coming quarters.  

RBC’s updated base case sees the index falling just 5 points over the next year. “This would reverse only one quarter of the record 20-point increase since the middle of 2020,” explained Hogue.

BoC research shows that interest rate hikes typically take 18 to 24 months to be fully priced in. With inflation cooling towards the target range, not nearly enough people see rates holding this level for that long. Once the BoC loses the ability to manage expectations, it can have a difficult time preventing speculative credit use.