Canada’s lack of housing affordability is coming for that record top spot. RBC senior economist Robert Hogue published his quarterly affordability assessment for Q4 2020. Home prices have increased almost enough to erase the drop in mortgage rates. The bank sees the current momentum pushing prices higher in the near term. If payments rise even a little, affordability hits the worst level since the 90s bubble.
Mortgage Payments Now Require Almost As Much Income As The Early 90s
Canadian housing is seeing affordability deteriorate to levels not seen outside of bubbles. Home prices in Q4 2020 require a median household to use 50.3% of their income to carry the mortgage. It’s within spitting distance, just 0.6 points lower, from the previous high in 2018. The previous high was the worst level of affordability since the bubble peak in the 1990s. Only one big difference this time — mortgage rates are near record lows.
Canadian Real Estate AffordabilityThe percent of disposable income a median household needs to carry the mortgage payments on a typical home across Canada. Source: RBC Economics; Better Dwelling.
Mortgage rates were near record lows during the most recent quarterly analysis. Generally, cheap mortgage rates improve affordability, since they lower servicing costs. However, mortgage rates don’t usually fall when home sales surge to record highs. In this case, the discount from mortgage rates were almost entirely eaten up by higher prices.
Canadian Housing Affordability To Worsen
Price activity in the first few months of 2021 may have already pushed costs higher than the 2018 high. Hogue observed, “further price escalation in the early months of 2021 has made their prospects even more challenging.” Adding, “smaller markets are losing some of their affordability advantage, which adds stress to buyers willing to move to a different town to find a home they can afford.”
In non-economist, the gap between affordability in small and big cities is closing. Even if people continue to gravitate to more rural properties — they won’t be getting much of a discount. He says, “this spread the housing fever around, such that these usually calmer markets recorded some of the larger price increases—narrowing their affordability advantage over big cities”
Pressures are going to meet with higher servicing costs in the not so distant future. This typically does one of two things — send servicing costs higher, putting a cap on price growth. The other option is home prices and servicing costs rise together, pushing shelter costs to crisis levels. The latter is what RBC sees happening at this point.
Hogue said, “with demand so strong and inventories so low, odds are prices will continue to rise in the near term, driving up ownership costs along-side. Adding, “We expect affordability pressures to build further—possibly significantly more. Rapid price escalation in smaller markets will make buyers’ pursuit of a home they can afford even more challenging.”
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