A rapid increase in interest rates has made Canada’s housing affordability crisis worse than ever, but relief could be on the way in the new year, according to the Royal Bank of Canada.
Households in the third quarter needed 62.7 per cent of their income to cover the costs that go into owning a home — the worst level on record, RBC said in its latest report on housing affordability. That’s a loss of 14.5 percentage points for affordability over the past 12 months, something author Robert Hogue called “astounding.”
The news is even more grim if you live in Vancouver or Toronto, where it takes 95.8 per cent and 85.2 per cent of income, respectively, to pay to keep a roof over your head. While income amounts needed for housing are less shocking in cities such as Edmonton or Calgary, at 41.6 per cent and 31.2 per cent, respectively, no housing market has been spared rising costs, RBC said.
The affordability crunch comes after home prices soared to new heights earlier in the pandemic. Then, a series of unexpected interest rate hikes to tame a fast-rising inflation rate made things worse for those seeking a mortgage. For example, to buy a home in Vancouver at the benchmark price in the third quarter of 2021, households needed an income of $200,000 to qualify for a mortgage. Fast forward a year later, and households need an income of $268,000 — 34 per cent more. It’s a similar story in Toronto, where households need to earn 29 per cent more to get a mortgage.
Smaller markets are also feeling the pain. In Halifax, income needed to get a mortgage is up 44 per cent in the third quarter from the same time last year. In Saint John, N.B., the minimum qualifying income is up 41 per cent — though it’s still the lowest in the country at $74,000.
“Higher mortgage rates require deeper pockets from coast to coast,” the report said.
Household incomes aren’t keeping pace with rising rates. In 2020, the median income across Canada was $84,000, data from Statistics Canada’s 2021 census shows. That means homeownership has been pushed out of reach for many, leaving only the wealthy able to afford to jump into the market.
“What was already a very tough hurdle to clear is now nearly impossible for many potential purchasers,” the report said.
However, relief could be coming soon. Home prices have been sliding since interest rates started rising. Those declines have slowed somewhat and RBC believes we are now in the final stages of the price correction. It expects the benchmark price of a home will have fallen 14 per cent from its peak by the spring, and that, combined with a pause in interest rate increases, will help ease the affordability crunch. At the same time, household income levels are also expected to rise, giving potential homebuyers more purchasing power.
Still, RBC expects it will take a while before the country experiences a marked improvement in affordability. “It will likely take years to fully reverse the tremendous deterioration that took place since 2021,” Hogue wrote.
The report comes as more people want to buy a home. In Ontario, 69 per cent of renters say they “really want” to own a home, according to a survey conducted by the Ontario Real Estate Association (OREA). But 82 per cent acknowledge that higher mortgage rates are making it difficult to fulfil their dreams.
Meanwhile, close to two-thirds of Ontarians say they are spending more than 30 per cent of their budget on housing amid rising interest rates. A further 95 per cent say the cost of living is more expensive than it was two years ago, with half saying they’ve had to cut back on restaurants, entertainment and grocery bills as mortgage rates climb.
“These rapid, outsized increases we have been seen to curb inflation are hurting Ontario’s families,” Stacey Evoy, OREA’s president, said in a press release. “It’s clear Ontarians are feeling the financial pressures of inflation amid an existing affordability crisis.”
OREA recommends governments boost housing supply to address affordability, along with providing additional financial aid for first-time homebuyers, exploring changes to the mortgage stress test, and increasing the CMHC mortgage amortization period from 25 to 30 years, among other suggestions.