Canadian real estate is in the largest bubble the county has ever experienced. RBC warns that housing affordability has eroded right across the country in November. In a research note to investors, the bank explains it’s now even harder to buy a home than during the 1980s bubble. A correction is now required to stabilize the economy, and even then it won’t be quick. The bank believes it will take years to undue the price damage done by the 2021 price surge.
Canada’s Real Estate Has Never Been Less Affordable
You call that a bubble? Today’s buyers might call that affordable housing. Canadian households have never needed to spend a larger share of their income to own a home. November home buyers would need to spend 62.7% of their household income to service a mortgage. It’s 14.5 points higher than last year, an incredibly sharp increase, and that’s right across the country.
The bank emphasized the country has never seen affordability erode to this level. Not in the 1990s bubble. Not even the 1980s bubble, when mortgage rates briefly rose above 14%. This is a challenge Canada has never seen before, and it’s no longer just a Toronto and Vancouver issue.
Ontario & BC Are Canada’s Least Affordable Real Estate Markets
Every market in Canada is seeing homeownership spiral, but not like Ontario and BC. In Toronto a household needs to spend 85.2% of its income to service a mortgage. Nearly a third of that increase occurred over the past two years, as prices surged. RBC sees the market giving back some of those gains not so far into the future.
“We think a further rollback of earlier outsized price gains is in the cards. In fact we see it necessary to stabilize the market,” explained Robert Hogue, RBC’s assistant chief economist.
Meanwhile in BC, its major real estate market is now one of the hardest markets to buy in the world. Vancouver buyers need to dedicate 95.8% of their income to service a mortgage. No other generation in Canada’s history has ever seen home prices outrun the incomes on such a scale.
“Owning a home has never been so unaffordable anywhere in Canada ever—and probably most places around the world,” said Hogue in regards to Vancouver.
Adding, “It will take further declines to reignite the ownership dream of many who have been shut out of the market. We expect activity to stay de-pressed while earlier price gains are partly rolled back.”
Canadian Real Estate To See A “Needed” Correction To Restore Some Affordability
Rising interest rates are the immediate cause of the sudden erosion, but not all. Not even the majority, if we’re being frank. Frothy prices, especially in smaller markets are the major issue. Even before interest rates increased, excess demand driven by low rates eroded affordability. RBC sees interest rates stabilizing, which will help to correct prices and restore balance.
How much of a correction the bank expects is a little tricky to see, due to their forecasting inputs. The bank called a 14% drop from the 2022 peak hit earlier this year. As we mentioned this summer, they use the RPS-Royal LePage aggregate HPI for this calculation. That doesn’t directly translate to the price movements you’re likely used to seeing.
The mild-ish sounding 14% correction would be one of the largest in history, if not the largest. A 14% drop would rival the 80s and 90s corrections using the RPS-Royal LePage HPI. The CREA HPI doesn’t have data prior to 2005, so a direct comparison is hard to make. However, the HPI is roughly 3x the movement seen on the RPS-Royal LePage HPI for periods that overlap.
Growing household incomes are also expected to help with affordability. As incomes rise and prices stagnate, or contract, markets become more affordable.
Fixing this market won’t be a short process like many think—it will take a long time. The extended run makes it difficult to appreciate how distorted markets have become. “It will likely take years to fully reverse the tremendous deterioration that took place since 2021,” said Hogue.