Canadian real estate is disconnecting from reality at a breakneck speed. RBC updated its affordability index for Q4 2021, measuring the share of income needed to buy a home. Housing affordability across most of the country is now out of reach for most households. Buying a home is nearly an “impossible” feat, according to one of the largest lenders in the country. This sounds like great news.
Canadian Home Ownership Costs Pushed To An “Extreme”
The bank uses the share of income a household needs to determine affordability. More precisely, the share of income a median household needs to service a mortgage on a typical home. A home in Canada requires 49.4% of income as of Q4 2021, up 1.6 points from the previous quarter. Over the past year, the share climbed 7.2 points higher — the second fastest annual jump ever.
RBC Housing Affordability Measure
Ownership costs as % of median household income.
“The deterioration over the past year is a near-record 7.2 percentage points—exceeded only once in 1990,” said RBC.
Toronto and Vancouver Real Estate Are Approaching Records
Remember, those are home prices across Canada — it’s much worse if you’re looking at Toronto and Vancouver. A median household in Toronto needs to spend 68.6% of their income in Q4 2021, up 10.8 points from a year before. According to the bank, the jump in servicing costs is second only to one made in 1990.
Vancouver makes Toronto look like a deal at this point, with RBC saying it’s the “worst” in Canada. A median household needs to spend 73.9% of their income to carry a mortgage for a typical home as of Q4 2021. This is a jump of 9.9 points from the previous year, and they expect it to get worse in the near term.
“Soaring prices are crushing affordability in those markets, as well as others in southern Ontario,” says RBC. “The deteriorating trend, however, is widespread with the RBC measure up in all markets we track in the past 12 months.”
Canadian Real Estate Outlook Is “Grim,” and “Impossible” To Buy
Preliminary data for the current quarter shows things have deteriorated even further. Home prices advanced nearly half the household median income per month so far. The bank argues this raised the bar to “impossible” levels, and they see it getting worse in the short-term.
“The outlook for affordability is grim: Rapid price escalation in the early months of 2022 has already raised the bar to impossible levels for many homebuyers,” said the bank. “And with the Bank of Canada now in the process of hiking interest rates materially—we expect a total increase of at least 150 basis points in the coming year—ownership costs look set to spiral even higher.”
Rising mortgage rates are expected to push carrying costs to the “worst-ever affordability.” The bank warns this would put buyers in a precarious spot, and reduce demand. Though at near record demand stimulated by low rates, a little less demand might be a good thing.