Canadian Property Affordability Near 90s Bubble Peak, and Likely To Blow Past It: RBC

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 Affordability

The 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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  • GTA Landlord 3 years ago

    Stephen did a good breakdown of this issue on Twitter, and why it’s actually worse today.

    The DL;DR is the 1990s, the median population was 10 years younger. Now you’ve got a median population that has 10 more years of education an earning power, with a higher percent of income dedicated to rent, now struggling to make the mortgage payment.

    Basically in 1990, this affordability issue applied to 30 years olds. Now it applies to 40 year olds.

  • Gerry 3 years ago

    It’s fine. By the time it hits 100%, we’ll finally have enough Millennial and Gen Z voters to eliminate Liberals from office for the rest of time. If we’re lucky, in 10 years they’ll lose party status like in Ontario.

    • Paul 3 years ago

      I’ve got news for you. The demographics of Canada are changing and the CPC doesn’t represent their interests. Quite a few immigrants will be coming to Canada because of climate change. Do you think they will vote in their local denier?

      • Bob Walter 3 years ago

        I agree that we only need people in Canada who can appreciate good hairdos, government bailouts, flimsy pressed wood houses and big government / central control.

        New immigrants should care less about starting their own business but instead prefer stimmy handouts. The CPC is done for sure.

        • Average Man 3 years ago

          I don’t want good hair. I want someone who’s gonna burn Rosedale and Westmount to the ground and put all of Bay Street in jail.

  • Yikes 3 years ago

    Because the best way for a country to prosper in the New Global Economy is to make housing an increasingly larger part of its GDP and have its citizens pay an increasing % of their disposable income for shelter and mortgages, right?

    Recent article in the G&M from also said Canada should focus on increasing its population to 100M. It’s clear our elites have no interest whatsoever into making Canada competitive with respect to any sort of technological endeavor. They just want to increase the consumer base to benefit already-entrenched wealth (real estate, banking, grocery stores). The strategy of a country like Canada should be to focus on technology and R&D like the Germans and Finland. It should not be to out-scale the US or China. You do not need American of Chinese population levels to be a technological powerhouse. We have fallen very short. That is how you improve the lives of ordinary Canadians — through productivity, not through financial gimmicks focused on scalar population growth.

    We are also being led by isolated group of elites obsessed with process and virtue signaling.

  • Jimmy 3 years ago

    The Bank of Canada still bought 8 billion in government of Canada bonds last week.

    If boc stopped buying or slowed purchases it would be a good first step.

    If they changed the process to disclose bids it would definitely help as well.

    Anyway part of me wants prices to go to the moon that will end the housing bubble for good but I fear the result.

  • Holton 3 years ago

    Did we print as much during the 90s? The problem with housing is the governments all over the world printed so much money. This will follow what happened after 2008, property prices will keep going up.

    What the government can do is tax people with multiple properties and foreign owned properties in hot markets such as Toronto and Vancouver.

  • ws 3 years ago

    “Millennial and Gen Z voters to eliminate Liberals from office for the rest of time.”

    The Cons aren’t any better. Do some research, when they were in power they reignited the bubble, which was about to deflate, by introducing the 40 year mortgage.
    The bubble will blow up, but it won’t be the politicians that will prick it.

    • Erik 3 years ago

      Damn straight.. it started under Harper and the BC liberals or west after the 2008 crash… This is a Canadian federal policy to inflate home prices, not a partisan one… Let’s hope it pops soon… This is outrageous, it’s expensive everywhere now…

      • SH 3 years ago

        Actually, it started under Mulroney and Chretien, for different reasons.

        Mulroney doubled immigration, sand it continued to rise from then on. Chretien shut down federal housing initiatives which had previously built significant housing stock, leaving the cities undersupplied.

    • SH 3 years ago

      When people say “do some research”, that generally means they themselves haven’t done any. This is obvious from your comment.

      Canada’s house price index shows very clearly that the major spikes in price began in 2016 after Trudeau spiked immigration and TFWs. Further measures like the shared equity scheme, combined with non-existent enforcement of anti-money laundering laws, poured gasoline on the fire. The Liberal government also forced banks to defer the mortgages of landlords without requiring the landlords to pass on the deferrals to renters – a despicable injustice.

      The 40-year mortgage under Harper was a very temporary measure that was promptly scaled back. Its impact was minimal.

  • Ugly Truth 3 years ago

    I’ll just say it. The problem isn’t that we have too many immigrants coming in. We’ve had almost no immigrants coming in for almost a year. The problem is, to be blunt, people are living too long. We have 80 year-olds “aging in place” and taking up five bedroom homes that young families could be moving into. If we got a little more [ahem} churn, the problem wouldn’t be nearly so bad.

    • Han Thanh 3 years ago

      It’s neither of those things. Prices are rising in cities where population is falling. Any excuse is being used to pay more.

      Population falling? Temporary.

      Immigration stopped? People around the word are just waiting to buy my home from me.

      Incomes are too low? A foreign company will come to employ everyone at higher wages!

      We can’t discount the effect foreign capital had on setting the initial bubble, and the subsequent fleeing of the cities. De-urbanization of young adults in Toronto only began in 2017. This is the policy failures of a single government.

  • Bruno 3 years ago

    The brain drain will accelerate.

    Today, a white-collar professional from Canada can already get 30%+ higher salary in cities like Chicago, Boston, Denver or Austin with a lower cost of living and lower cost of housing.

    Canada has so many rough edges that it really needs to be more affordable to be attractive. It cannot command Swiss prices while offering very low levels of sophistication and refinement in basically everything.

    From Numbeo, Austin vs. Toronto:

    Consumer Prices in Toronto are 20.09% higher than in Austin, TX
    Consumer Prices Including Rent in Toronto are 9.77% higher than in Austin, TX
    Restaurant Prices in Toronto are 15.35% higher than in Austin, TX
    Groceries Prices in Toronto are 12.92% higher than in Austin, TX
    Local Purchasing Power in Toronto is 40.73% lower than in Austin, TX

    Furthermore, with the historic shift to remote working, an increasing number of skilled would-be immigrants could choose to remain in their more affordable home countries while still tapping into global job opportunities online. This could be driven by both employers (they just wont create the job locally if they could hire remote globally) and employees (they could optimize on a mix of lower cost cities and higher revenue remote work). In other words, the same thing could happen to white collar office jobs now that have happened to blue collar manufacturing jobs in the past 30 years.

    If these trends continue, there could be an increasing number of skilled Canadians leaving for the USA while their replacement through immigration could be disrupted due to the growing tide of remote work.

    • Average Man 3 years ago

      So unrefined I don’t even know what you mean by lower levels of refinement. Please elaborate. Also, what’s so refined about Boston or Chicago? Have you met Bostonians?

      • Bruno 3 years ago

        By refinement I mean things like architecture, city planning, or service culture (banks, restaurants, etc.) Toronto is not refined by these measures. It is rather coarse.

        Let me mention three things that I feel are = symbolic of Toronto’s shabbiness:

        1. Above ground power lines. In Europe, you really have to go to the Balkans (think Albania, Serbia, Romania) to see such things in the cityscape. In Toronto, you have above ground power lines even in the most touristic areas like on King Street or in front of museums like AGO.

        2. No Michelin-star restaurants. Michelin-star restaurants are advantageous for their trickle-down effect. It requires a quality supply-chain, local produce, appreciation of good design, etc.

        3. The Gardiner. Structures like the Gardiner have been built all over the world in the 1950s but in smarter cities, communities realized how detrimental they are to quality of life and urban development in general. That is why you no longer have these concrete structure in the middle of the city in Amsterdam, Budapest or Boston. Amsterdam reversed course starting in the 1970s, Boston in the 1990s, Budapest in the 2000s. Toronto is still partying like it’s 1959.

  • Doomcouver 3 years ago

    Real estate values in Toronto fell over 40% in real terms after 1989. I guess politicians learned nothing of value from the Toronto condo crash. Let’s try this again guys……

  • James 3 years ago

    Ya people don’t move out until they’re 30.

  • James 3 years ago

    The problem is speculation.

  • James 3 years ago

    The government should let them loose their shirts.

  • James 3 years ago

    Immigration doesn’t help the problem.

Comments are closed.