Canadian real estate is disconnecting from reality at breakneck speed. RBC updated its affordability index for the fourth quarter of 2021, measuring the share of income needed to buy a home. Housing affordability in 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 country’s biggest lenders. This seems like great news.
Homeownership costs in Canada pushed to an “extreme”
The bank uses the share of income a household needs to determine affordability. Specifically, the share of income a median household needs to pay off a mortgage on a typical home. A house in Canada requires 49.4% income in the fourth quarter of 2021, up 1.6 points from the previous quarter. Over the past year, the share has climbed another 7.2 points – 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 – surpassed only once in 1990,” RBC said.
Real estate in Toronto and Vancouver nears record highs
Remember, these are house prices across Canada — it’s much worse if you look at Toronto and Vancouver. A median household in Toronto is expected to spend 68.6% of its income in the fourth quarter of 2021, up 10.8 points from a year earlier. According to the bank, the increase in maintenance costs is the second after that of 1990.
Vancouver is making Toronto look like a bargain at this point, with RBC claiming it’s the “worst” in Canada. A median household needs to spend 73.9% of their income to take out a mortgage on a typical home in Q4 2021. That’s a jump of 9.9 points from a year earlier, and they’re expect the situation to get worse in the short term.
“Rising prices are crushing affordability in these markets, as well as others in southern Ontario,” RBC said. “The deteriorating trend, however, is broad based with the RBC measure rising in all markets we track over the past 12 months.”
Canadian real estate outlook is ‘gloomy’ and ‘impossible’ to buy
Preliminary data for the current quarter shows that things have deteriorated further. House prices have risen by almost half of median household income per month so far. The bank argues this has raised the bar to “impossible” levels, and it sees the situation getting worse in the short term.
“The outlook for affordability is bleak: rapidly escalating prices in the early months of 2022 have already raised the bar to impossible levels for many homebuyers,” the bank said. “And with the Bank of Canada now in the process of raising interest rates significantly – we expect a total increase of at least 150 basis points over the coming year – ownership costs are expected to rise further. .”
Rising mortgage rates are expected to push port charges to the “worst affordability ever”. The bank warns this would put buyers in a precarious position and reduce demand. Although at near-record demand spurred by low rates, a little less demand could be a good thing.