Housing Trends and Affordability - September 2021

Highlights

  • RBC’s aggregate affordability measure worsens the most in more than 30 years:
    It soared 2.7 percentage points to 45.3% Canada-wide in the second quarter. This was the fourth-straight increase, entirely rolling back the improvement that occurred at the start of the pandemic.
  • Every market and housing category got less affordable: RBC measures increased across the board. Toronto, Vancouver and Ottawa recorded the largest deteriorations.
  • Still, ownership costs aren’t an overly heavy burden in the Prairies and parts of Atlantic Canada: They continue to represent a smaller-than-average share of household income in these regions. The burden is heaviest in Vancouver, Toronto and Victoria.
  • Affordability to become even more strained: We expect home prices to continue to rise in the near term, as demand-supply conditions generally remain exceptionally tight. This will further raise ownership costs across a wide spectrum of markets and housing categories. That said, the affordability deterioration is poised to moderate. The rate of price appreciation is now slowing in many places, and we project prices to flatten in 2022.

Important revisions to RBC’s affordability measures

This instalment of Housing Trends and Affordability introduces two key changes to the calculation of RBC’s measures that will provide a better representation of the weight of ownership costs across Canada. The impact of these changes is significant, altering both levels (downwards) and trends (flatter) of the measures materially. The first change is the use of a new mortgage rate series—the rate chartered banks charge on funds advanced for 5-year fixed mortgages—that better reflects what borrowers actually pay in the marketplace. Previously, RBC’s measures were based on the average posted rate from chartered banks, which had become less representative of contracted client rates over the years. The wide difference between the two rate series—posted rates exceeded rates on advanced funds by a whopping 270 basis points in the second quarter—resulted in large downward revisions to mortgage payments and RBC’s measures (a decline in the measures represents an improvement in affordability). Those revisions are more substantial in recent time periods because the rate difference widened substantially over time. Using the new, lower mortgage rate series slashed 12 percentage points off the previous aggregate RBC measure for Canada in the second quarter.

The second change in our methodology is the assumption of a 20% down payment—the minimum for an uninsured conventional mortgage—instead of 25%. The higher loan-to-value going into our calculations has the effect of raising mortgage payments across all time periods. This added 2.4 percentage points to the aggregate measure in the second quarter (with similar-sized increases in earlier periods).

On net, these changes paint a more positive affordability than before. They subtracted a sizable 9.6 percentage points from the national aggregate last quarter though the impact was smaller in the past—it was in fact negligible prior to the 2000s. Revisions to RBC’s measures are more significant for pricier housing categories (e.g. single-detached homes) and more expensive markets (e.g. Vancouver and Toronto) reflecting their higher interest rate sensitivity.

Widespread price gains deliver a huge blow to affordability

While Canada’s housing market isn’t as frenzied as it was at the start of this year (a good thing), it continues to operate at historically strong levels. Robust demand and extremely tight demand-supply conditions cooked up property values by several more degrees in the second quarter, contributing to a generalized deterioration in affordability. RBC’s aggregate measure for Canada jumped an outsized 2.7 percentage points—the biggest quarterly increase in more than three decades—to 45.3%, entirely rolling back the sharp improvement we saw at the start of the pandemic.

Dreams of owning a single-family home more difficult to achieve

The share of income necessary to cover the costs of owning a single-detached home in Canada is not only high, it’s also rising rapidly. In the second quarter, that share surged 3.0 percentage points to 49.7%—well above the long-run average of 43.1%. Soaring demand for properties with larger living spaces have lit up single-family home prices during the pandemic. Owning a condo apartment, on the other hand, continues to be relatively more affordable. RBC’s national condo measure was 32.6% in the second quarter.

Affordability eroded in all major markets but still within buyers’ reach in many parts of the country

Toronto (up 4.1 percentage points), Vancouver (up 3.2 percentage points) and Ottawa (up 3.1 percentage points) recorded the largest increases in RBC’s aggregate measures last quarter though the deterioration was widespread, affecting every market we track. Overall, affordability is most strained in Vancouver (ownership costs represent 63.5% of household income), Toronto (59.1%) and Victoria (48.0%). Ottawa (38.5%) and Montreal (38.4%) are two other markets where RBC’s aggregate measures look historically high. The situation is more positive in many parts of the Prairies and Atlantic Canada, however. Despite recent increases, RBC’s measures are still below their long-term average in Calgary, Edmonton, Regina, Saskatoon, Winnipeg, Saint John, Halifax and St. John’s.

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.

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.