Canada's housing market heat strains affordability

Highlights:

• Soaring home prices rolled back earlier affordability gains: Red-hot markets led to a second-straight jump in RBC’s national aggregate measure, up 1.3 percentage points to 50.3%—effectively back to where it stood before the pandemic.
• Ownership costs rose in all regions in the fourth quarter: Toronto, Ottawa, Vancouver and Montreal recorded the largest increases among the markets we track.
• Prairies, Atlantic Canada still relatively affordable: These markets maintained attractive positions despite some deterioration over the second half of 2020. Affordability issues are most acute in high-priced Vancouver, Toronto and Victoria.
• The near-term outlook is grim for home buyers: Further price escalation in the early months of 2021 has made their prospects even more challenging. 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. Condo apartments remain the more viable option for many though we see upward price pressure building later this year.

Broad-based erosion

The housing fever that struck Canada last summer took a widespread, albeit uneven toll on affordability across the country in the fourth quarter. RBC’s affordability measure rose in all markets we track (an increase represents a loss of affordability). Toronto, Ottawa, Vancouver and Montreal recorded the most significant deterioration, as super-tight demand-supply conditions propelled property values at the fastest rates in years. The worsening was slighter in parts of the Prairies and Atlantic Canada, however. Upward price pressures were less intense in these regions despite sellers firmly in the driver’s seat. The pandemic caused a surge of interest for properties with larger living spaces. This ultimately pumped up the price for single-detached homes—already in short supply in many parts of Canada prior to the pandemic—making it less affordable to buy them. RBC’s measure for single-detached homes surged 1.4 percentage points to 54.7% in the fourth quarter. Condo apartment affordability, on the other hand, remained little changed for the most part with some markets seeing a small improvement. Condo prices slipped in Toronto, Vancouver, Edmonton and a few other markets in the face of plentiful inventories. RBC’s national condo measure inched 0.1 percentage points higher to 38.4%.

Pandemic has narrowed smaller markets’ affordability advantage

The search for larger living spaces, and reduced attachment to live in, or near, core urban areas took many buyers to smaller, more affordable markets. 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. Since the pandemic, mortgage carrying costs have increased more as a share of household income in Windsor, Hamilton, Halifax and London than in Vancouver, Toronto or Montreal. Toronto’s ratio, in fact, is still below pre-pandemic levels, despite rising in the fourth quarter.

Majority of major markets still within historical norms

With ownership costs rising in all markets last quarter, the relative affordability picture remained little changed. The most affordable markets in the country are found in Atlantic Canada and the Prairie Provinces. Saint John (with an RBC aggregate measure of 23.1%), St. John’s (24.2%) and Regina (26.1%) continue to get top grades. Vancouver (78.8%), Toronto (67.6%) and Victoria (55.3%), on the other hand, get the poorest scores. All three are Canada’s priciest markets. Following years’ long erosion, Montreal (43.5%) and Ottawa (40.0%) now pose a higher degree of strain for buyers—though not extreme. Affordability in all other markets we track is near historical norms or better.

Market frenzy to keep things challenging for buyers

The pandemic—and the policies put forward to overcome its economic impact—really cranked up the heat on Canada’s housing market. It’s now overheating in many parts of the country with property values soaring beyond historical norms. With demand so strong and inventories so low (with some exceptions), odds are prices will continue to rise in the near term, driving up ownership costs alongside. 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.

Read the full Housing Trends and Affordability report for extensive market-by-market analysis.

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Robert Hogue is responsible for providing analysis and forecasts on the Canadian housing market and provincial economies. Robert holds a Master’s degree in economics from Queen’s University and a Bachelor’s degree from Université de Montréal. He joined RBC in 2008.

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