Canada’s largest bank observed the fastest deterioration of home prices in decades. RBC economists crunched the numbers on housing affordability for Q2 2021. The bank found the share of income needed to carry ownership costs on the purchase of a home has surged. Even with negative mortgage rates (or because of?), affordably made the biggest jump in 30 years. The typical households can no longer afford a typical home across Canada.
Canadians Need To Use Over 45% of Their Income To Pay The Mortgage On A Home Purchase
Canadian real estate at the national level worsened at the fastest rate in three decades. The share of pre-tax household income to carry ownership costs reached 45.3 percent in Q2 2021. It climbed 2.8 points from the previous quarter, and is 4.1 points higher than last time. RBC data shows it is the fourth straight increase, rolling back any pandemic improvements.
Improvements during the pandemic? That might have caught your attention, since prices didn’t fall. The cost of financing fell sharply though, lowering carrying costs. Home prices didn’t drop, but it became more affordable to carry larger debts. As mentioned earlier this week, prices have now absorbed the rate discount. In fact, it absorbed the rate discount, and then some.
RBC expects affordability to worsen in the near term, but sees home price growth flattening next year. They’ve observed a slow down in many markets now, but prices rising slower is still rising. By next year though, affordability might be so stretched, it can no longer be pushed without additional stimulus.
Canadian Housing Affordability
The share of income a median household would need to spend on homeownership cost for a typical home purchase in Q2 2021.
Source: RBC; Better Dwelling.
A Mortgage In Toronto Now Requires 59% of The Typical Household’s Income
Toronto real estate remains the second least affordable market, and it’s getting worse. The median household required 59.1 percent of income to buy and carry a typical mortgage in Q2 2021. This is up 2.7 points from the previous quarter, and up 4.7 points since last year. Even with home price growth lower than the national average, affordability worsened faster.
Household incomes and home prices in Toronto are now greatly disconnected. The average share of income to carry a mortgage is 48.5 percent since 1985. Not exactly affordable, but 10 points above this level is bordering on the absurd. This is also gross income, so there are other factors to consider such as tax rates, and other carrying costs. Not to mention the down payment issue, which is a whole other article for another day.
Vancouver Real Estate Is Still The Least Affordable In The Country
Greater Vancouver real estate remains the king of unaffordable housing in Canada. The share of income required reached 63.5 percent in Q2 2021. This is an increase of 3.2 points from the previous quarter, and it’s 4.9 points higher than last year. Nearly two-thirds of income to purchase a typical home — not even a detached one.
Historically Vancouver has always been expensive for local incomes, just not this expensive. Since 1985 the average was 57.8 percent, which still excludes most households. Yet somehow the City managed to absorb a massive mortgage rate cut, and then some to consume a larger share. The gap between the rich and the “middle” of the city is the widest in Canada.
Having affordability deteriorate as mortgage rates are cut is a risky game. If rates rise, and high inflation may force it, they’re most likely to bring down prices. However, if they rise and don’t bring down prices, affordability becomes even worse. This leads to a risky scenario where rates can’t be cut, or people can’t afford housing. Death by inflation or housing affordability, banker’s choice.
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