Canada

RBC: Canadian Real Estate Is The Least Affordable Since 1990

Not that you needed a report to tell you this, but Canadian real estate is now at record levels of unaffordability. The RBC Economics Affordability Index approached record highs in Q2 2018. The index, which tracks how expensive it is to buy a home, hasn’t been this high since the 1990 Canadian real estate bubble.

About The RBC Affordability Index

The index is pretty straightforward, so it doesn’t need all that much of an explanation. The captures the amount of income a median family would need to use, to buy a typical home. The income is pre-tax, and the costs don’t include taxes or utilities. The payments also assume a 25% down payment, with a a 25 year amortization at a 5 year fixed rate. In case you didn’t catch that, it downplays the costs of homeownership.

Reading it is pretty simple. If it goes higher, more income is required to carry a mortgage. That means affordability is deteriorating. If it goes lower, less income is required to carry a mortgage. That means affordability is improving. Recently it felt like a lack of affordability index, but markets like this don’t last forever. You’ll see it in the chart.

The Deterioration of Affordability Is Mainly Due To Interest Rates

Prices have stalled, but affordability continues to deteriorate as interest rates are rising. RBC Economics analysts noted “stabilizing” home prices, but “virtually the entire” 2.6 point increase on the index was due to rising rates. Additionally, most of the 1.1 points increase in 2018 Q2 was due to rising rates. Fast rising rates impair price growth, but they also make it more expensive to borrow.

Canadian Real Estate Is The Least Affordable Since 1990

Canadian real estate hit the least affordable numbers its seen in decades. The cost of carrying a mortgage on a typical home reached 53.9% since Q2 2018, the highest we’ve seen since Q2 1990. Breaking that down, single-family detached homes hit 59.3%, just under the previous all-time high hit in Q2 2017. Condo apartments reached 42.8% in Q2 2018, under the 1990 high of 49.8%.

Canadian Real Estate Affordability (RBC Index)

The percent of income required by a median household to service mortgage debt on a conventional mortgage across Canada.

Source: RBC Economics, Better Dwelling.

Toronto Real Estate Is The Least Affordable… Ever

Toronto real estate has never been less affordable, with the exception of condos. The cost of carrying a mortgage on a typical home hit 75.9% of income in Q2 2018, beating the previous record in Q3 2017. Breaking it down, a single-family detached home requires 91.3%, hitting the previous high in Q3 2017. Condo apartments reached 46.6% in Q2 2018, still below the 48.1% in Q2 1990.

Toronto Real Estate Affordability (RBC Index)

The percent of income required by a median household to service mortgage debt on a conventional mortgage across Greater Toronto.

Source: RBC Economics, Better Dwelling.

Vancouver Real Estate Hits Crisis Levels of Affordability

RBC analysts noted it’s not an exaggeration to call Vancouver real estate affordability a “crisis.” The price of a typical home requires 88.4% of income in Q2 2018, the highest level since 2017 Q3. A detached home now requires a 119.9% of income, also the highest level since 2017 Q3. Condo apartments hit 52.5% in Q2 2018, still below the all-time high in Q2 1990.

Vancouver Real Estate Affordability (RBC Index)

The percent of income required by a median household to service mortgage debt on a conventional mortgage across Greater Vancouver.

Source: RBC Economics, Better Dwelling.

Interest rates are just above all-time lows, so expect them to rise even further. If prices are stable (a.k.a. flat) when that happens, affordability will deteriorate further. RBC Economists see stabilizing prices, but UBS analysts believe the rise in rates will put a cap on medium to long-term growth.

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36 Comments

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  • Raging Ranter 3 weeks ago

    Jungle will be along any moment now to tell us why this doesn’t matter. He’s like a poster child for bubble mentality. The poor bastard has no clue what he’s in for.

    • Cam 3 weeks ago

      Gotta love people that don’t realize the basic concept of liquidity. Your Beanie Babies may be worth a trillion dollars, but if there isn’t someone to pay a trillion dollars, it’s as good as useless.

  • Cam 3 weeks ago

    The average detached home in Vancouver needing 119.9% of income sure sounds like crisis. Actually how does this not scream too much foreign investment signalling more dramatic steps needed to curb that type of investment? In short, what a mess.

    • Van Millennial 3 weeks ago

      The fact that condos are “affordable” is what they’re selling down here, but they’re all one-bedroom closets. It’s now impossible to have a family in Vancouver if you’re not obscenely wealthy.

      • Cam 3 weeks ago

        Vancouver and Toronto, hell the whole GTA, are a complete write-off in my opinion. And you are right, closets for half a million doesn’t mean things are okay in Vancouver despite what realtors will tell us. The biggest thing I’m seeing here is the Canadian real estate scenario as a whole. If we are at 59.3% for average incomes and average detached homes then there is a real issue. We can’t just say it’s only Vancouver and Toronto that are unaffordable. We will see an interest rate increase soon too, and after that I see late 2019 being the recession and end to the silliness of it all with housing prices. It has to pop. The cost levels just aren’t sustainable anymore and we can’t borrow against theoretical future gains in value of properties to cover today’s shortfalls. That ship has sailed.

        • Van Millennial 3 weeks ago

          Also keep in mind those were pre-tax, so even a condo can’t be bought after typical taxes. Especially if you like frills like eating.

  • Janet 3 weeks ago

    Good God this is so depressing. Why did I immigrate here? I foolishly thought I’d have a chance at a better life but I see now with 40% of my pay going to taxes, completely out of touch home prices, and endlessly rising rents I am better off elsewhere or back in the US.

    • Mica 3 weeks ago

      The Canada we sell to immigrants is long gone. Just look at the politics.

      Vancouver is turning into a great talent export for San Francisco though.

    • Asterix1 3 weeks ago

      The Canadian dream sold to new immigrants settling in GTA/Vancouver has expired! As these opportunities are no longer achievable (home ownership, decent jobs/wages, savings for emergency/retirement) our politicly correct MSM and elitists have now started to incorrectly blame “white privilege” for all the ills of society.

      Our immigration policy has been all about quantity. Limiting slightly the number of new immigrants would be a wise option as the next recession is coming straight at us. It is our duty to offer opportunities if we allow people to come to Canada. Brutally high child poverty rates in GTA is our reality. Why import more poverty when we have not even fixed it here? Poverty Inc is happy, business is good!

      In regards to RE in GTA, the bubble has already popped a while back. All segments are already down, condos are next, last one standing! You cant pump this market back up, ponzi scheme is over, its a dead man walking…

    • gisele 3 weeks ago

      I fees exactly the same…Why did I immigrate here ..and the question is – it was very easy..I came thru the “skilled worker” program 10 years ago and took me 10 months from to start to lending in Toronto..
      With the housing, daycare and essentials so expensive it’s not worth it..
      A lot of people bring up the health care…Universal health care exist in a lot of countries…I come from one and the comparison so far is not in favor of Canada especially when it comes to actually finding a cure …In Canada they just “treat” you …
      Just my opinion..I dont’ mean to sound negative ..I love Canada as a country – the nature, the people but as a state is horrible

    • Eric 3 weeks ago

      That’s why we left Victoria. It took THREE YEARS to get a family doctor and the rentals are all from the 70s unless you want to live in someone’s ratty little basement apartment.

      And the jobs were crap too. Went back to Seattle and our income doubled. Better jobs and higher wages for those jobs. And I noticed Vancouver was trying to attract Amazon by boasting about the lowest tech wages in North America. Really just pathetic.

      So much potential, but BC just wants to coast on it’s “special place” reputation.

  • Trader Jim 3 weeks ago

    The exact problem financial planners have been warning people about with the high cost of housing. All of that debt that people accumulated is manageable when you take it out (maybe). When interest rates pop up to normalization at 3%, you’re looking at paying twice of what you did when you first took out the loan. It’s basically a debt trap set by the BoC. There’s a reason why THEY are warning people they’re screwed if you over extended yourself.

  • SUMSKILLZ 3 weeks ago

    Its not only the debt figures. I bought a 2002 built house in 2010 and it is completely falling apart. Every six months I have a new WTF!? experience with the house. I have surprisingly expensive costs to repair or replace this, that and the other. Its something I did not fully grasp prior to owning a home. It creates budget problems that are seemingly random. My parents never spent thousands a year on home repairs, stuff lasted decades. Not anymore.

    • Montreal Matt 3 weeks ago

      Tell me about it. It’s also absurdedly expensive to hire tradesmen to do repairs and renovations so you have to do it yourself. I bought a house built in 1960 that had practically never been renovated and even the basic maintenance was lacking, I’m putting 100+ hours a year catching up. At least I’m having fun and still have ten fingers, so that’s nice.

    • Montreal Matt 3 weeks ago

      Tell me about it. Boought a house that was built in 1960 and never renovated, and just the bare minimum maintenance. Tradesmen are extremely expensive, so even though I make multiples of the median income in my area I can’t afford to pay for it and have to do it myself to the tune of 100-200 hours a year. At least I’m having fun and still have ten fingers, so that’s nice.

    • Scott MacKinnon 3 weeks ago

      That is so true about the quality of building. My house is 120 years old and is as solid as the day it was built. I’m still walking on the original hardwood flooring!

  • Jungle 3 weeks ago

    This index is flawed to measure GTA. RE here is now fundamentally supported by wealth. The days of 3X your income are WAY gone. Maybe there rest of the country, sure. GTA has the only global cities that can support this.

    Ask yourself this: How else did 710 detach sell last month @ 1.4M?? (ZOLO) Not off median income, lol

    Condos are still surging in price. So much for the stress test, and raising interest rates (had basically NO negative impact)

    Do you go to New York city and expect to afford RE? This is what’s happened here. It’s not going back; supply and demand too tight (MOI) and T.O too desirable. Tech jobs galore, investment and strong local economy, immigration, no major highway or subway investment = higher housing prices and very dense city.

    In 10-20 years you will need 2-3 roommates to rent, expect now rents to keep climbing WAY beyond inflation, vacancy rate LOW 1%. No major rental stock coming to market and GTA will increase population to 10M by 2040.

    You can only win here buying RE. Move up property ladder. Buy in the east GTA now before prices catch up. Some RE 1/2 price still vs Toronto and West. This will not last.

    So many “house horny” as Garth says, the ratio might be 9:1 you are not going to win against the desire.

    Get is now by the time the stock market crashes, you can invest your HELOC and rent rooms air BNB- let the pay your mortgage while you pad your TFSA and RSP. In the end you have a roof paid off; retirement accounts maxed out.

    What an easy way to make wealth the world is getting so expensive, the BOC doesn’t track proper inflation-you cannot afford to bet against this anymore.

    • Brad 3 weeks ago

      lol some people are so delusional, you really don’t even realize that the US fed specifically talked about the position Canada has with major debt and leverage on assets that can depreciate as the worst case scenario that bursts housing bubbles?

      Also your scenario is flawed, as it has been shown many times that it is actually cheaper to buy the average in NYC in comparison to Toronto, and that’s an actual world city… Toronto is not.

    • Brad 3 weeks ago

      Also do you actually not see that volume is dried up in actual numbers by roughly 50% in the GTA? Really? The last time we saw volume this low was during the worst financial crisis since the great depression. Keep your eyes closed though 🙂 I’ll keep my money in the market like I have and do 350% on the S&P500, 1800% on a basket of tech stocks, and 2800% on MJ stocks since 2009 alone… while the “precious” real estate has doubled.

      • Jungle 3 weeks ago

        Brad I think this is because the big luxury stuff (4,5 bed + ) completely stalled after the unfair housing plan spooked the market.

        To support this, have a look at HPI for 416 detach since peek. It’s barely changed. However average price saw a bigger dip, because bug luxury skews the market.

        in 08-09 an average detach was about 500k and is now 1.4m

        If you had a hedge fund, sounds like it would be successful!

    • Brad 3 weeks ago

      If you think this graph isn’t an 80s replica and unsustainable, I’m not sure what to tell you 🙂

      https://toronto.listing.ca/real-estate-price-history.htm

      • Iain Palmer 3 weeks ago

        Brad … I had a look at your graph of prices in the toronto market, according to that graph a detached home in Toronto bought in 2000 for $250K is now worth $1.1M (2018). That is about 8.5% growth compounded annually for 18 years. My research of the growth rate of houses in Vancouver from 1947 to 2007 (ie 60years) suggests a growth rate of 8%, compounded annually. I think that these growth rates are very much sustainable.

        • Brad 3 weeks ago

          Actually with real estate they’re not, as seen in the past real estate needs to sit around 3% compound growth in real money in order to be sustainable, and it also needs to be a linear graph and not a log curve like the current one I linked. I’m not sure where you get your 8% compound in real estate is sustainable, as literally every economist says otherwise, but it’s not even a true linear compound but a logarithmic climb, which we’ve actually never seen sustain in real estate yet.

          Also the downtrend on that graph is extremely scary right now, especially with volume now drying up and at the lowest since 2008 in actual sale numbers. Volume drops precede inventory climbs, which precede price drops. Right now we’re in the inventory climbing stage of a market, and that should take another 12 months before it is backlogged enough to start really bringing prices down.

        • @xelan_gta 3 weeks ago

          8% sustainable? I appreciate you are doing research but your mistake is that you are comparing to a peak of 20y bull trend.
          OK, put bubble aside, even from affordability view right now Toronto is at about 8 Price-to-income ratio and it’s already considered extremely unaffordable.
          Make a simple projection for the next 50 years where prices will grow by 8% and income will grow by 2% and you will get price-to-income of 140.
          That would be equivalent to having $100k median income today and $14M median property price.
          Does it look sustainable to you now?

    • Raging Ranter 3 weeks ago

      If it was truly wealth driven, household debt figures would not be through the roof right now. Also, even wealthy people can make mistakes. They’ve been riding an asset bubble for ten years now. Using asset gains to purchase more of the same asset is what Minskey called Ponzi investing. It indicates the very end of the credit bubble.

    • Asterix1 3 weeks ago

      Jungle,

      I do not want to be mean, but you are completely missing the boat when it comes to understanding what is presently happening in GTA RE market. Spend time analysing data instead of listening to TREB/realtors/bank analysts/MSM/developers/builders.

      One quick example (and I could pick many others)

      You wrote: “Condos are still surging in price. So much for the stress test, and raising interest rates (had basically NO negative impact)”

      Reality: Of course prices went up in condos, the stress test/rates had a direct impact! People could no longer afford anything else (or more importantly qualify for it, B20), they jumped and overbid themselves like suckers in the last segment that they could get. Big mistake, condos are heading south, last segment to fall.

      PS: I have a feeling we are getting a big 0.5 rate raise at the end of the month!

      • Brad 3 weeks ago

        Sorry but you’re not going to see a 50 basis point raise by BoC, as all increments will move based on 25 basis points for quite awhile. They will definitely raise this month, but it will be an increase of 0.25%

      • Jungle 3 weeks ago

        I look at MOI and average price trends. Right now condos are under 2 months and detach sitting at 3 (ZOLO)

        Considering stress test, and raising interest rates, unfair housing plan, etc, this was not supposed to happen.

        2-3 months MOI can mean price increase, very stable market. Especially when economy is strong like it is now.

    • Willy 3 weeks ago

      What you’re saying here doesn’t make sense to me at least. I recommend doing more research instead of listening to certain people

      • Roger Troutman 3 weeks ago

        What makes NO sense to me is taking real estate advice from people who don’t invest in real estate.

  • Jim Sparrow 3 weeks ago

    RBC should do the rest of Canada (RoC) a favour and strip the Toronto, Lower Mainland and Victoria markets out of their affordability study. I’m sure the numbers would be pretty mundane and hardly worth writing about.

  • Bubble Boy 3 weeks ago

    In the words of Speedy Alka Seltzer “Pop, pop, fizz, fizz. Oh, what a relief it is.”

  • Bob 3 weeks ago

    What have local incomes got do do with it in a globalized economy? In Vancouver, 100% of the demand at the top comes from offshore concentrated global wealth. We have had multiple years here where real estate value growth has dwarfed provincial GDP. Selling real estate to foreigners IS now the primary economic driver of B.C.! I don’t think anyone is under the illusion that the wealth in this province comes from anywhere else. (And no, the offshore money has not dried up – just look at any commercial RE transaction in this city – you know, the ones where no foreign buyers tax is paid.)

    A single influx of $8,000,000 to purchase a single home has ripple effects across many other home purchases, and it flows across the entire province. More informative graphs would show levels of global wealth against Vancouver RE prices. This would actually be very interesting.

    Local wages have been completely disconnected from local prices for years. It is a terrible, terrible thing for the social fabric of the city. Here’s an argument how society might be more stable with less wealth inequality and more poverty:
    https://www.vox.com/2018/5/24/17368308/income-inequality-poverty-in-america

  • Contrarian 3 weeks ago

    Rents have risen dramatically in Toronto too. Affordable rents are disappearing except for those who are already renting and they are in rent controlled apartments or have a lot of money

    Home ownership, regardless of type of home, is unaffordable for an increasing number of people too, even those who already own a home are being pushed over the edge of affordability when they have to renegotiate their mortgage.

    I have seen this before, inflated prices, high interested rates, etc., with the result that real estate prices significantly and rapidly dropped.

    • Iain Palmer 3 weeks ago

      As demand for high-end homes increases due to the influx of wealth from overseas (Canada is the best places on Earth to live and Vancouver/Toronto are the jewels in the crown), the price of homes will rise and it has a flow-on effect to Middle income homes and lower-income homes and also the condo Market. As the price of real estate increases so too does the price of rentals in order to generate a higher return for the increased value. As rental prices increase pressure on renters increase and eventually more and more people want to get into the game and benefit from the high price of rentals. However at least here in Vancouver we see the government step in and dabble in the basic economics of supply and demand. They slap on controls to rent increases. They are also extremely slow to increase densities and deal with individuals wanting to build more homes and rental properties. what we have now in Vancouver and Toronto is exactly what one would expect and I should think that eventually the forces of supply and demand will come into play and corrections will take place. As I’ve said in a comment above the rising prices of Toronto real estate over the last 18 years is about 8.5% compounded annually. In Vancouver from 1947 to 2007 (60yrs) the annual compounded growth rate of homes was also around 8%. I suggest to you all things are as they should be and will unfold as one would expect. I do however think the federal government should clamp down on selling Canadian citizenship to the wealthy. Furthermore we should all register non-citizens on the title of properties that they buy so that they pay their fair share of capital gains tax when they sell those properties. All are levels of government have a lot to answer for and it’s high time we had people in Municipal provincial and federal politics standing up for Canadians and putting them before the rest of the world.

  • rx81 3 weeks ago

    Looking at moving to the GTA in the next few months. How does one go about affording a house in the GTA? When I go to bank websites on affordability calculator, turns out that even with a 250k income and 500k down and no debt, the max these sites are saying is I can buy $1.5 million. Yet on realtor.ca, $1.5 million gets you an average cookie cut house in the GTA. The houses I was hoping for range in the $2.5 -$3 million range. I have a feeling that their formula online is 4 x salary + downpayment.

    One of two things are happening, either people are making (what I think) is an insane amount of money..household incomes are above $400k or banks are lending out more than what they claim on their website on “how much can you afford” calculators. If the later is the case, anyone knwo what that multiple typically is with a good credit score?

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