The latest housing affordability report from the Royal Bank of Canada (RBC) paints a bleak picture of the Canadian housing market, indicating unprecedented challenges for prospective homebuyers and labeling at least one city’s situation as a “full-blown crisis.”
Despite a brief pause last summer, the Bank of Canada’s relentless campaign of interest rate hikes continues to exert pressure on the housing market. This relentless push has propelled the cost of homeownership to unprecedented levels in the fourth quarter of 2023.
Robert Hogue, RBC’s Assistant Chief Economist, highlights that households now face an alarming burden, with housing costs consuming a staggering 63.5 percent of the median income to afford a home at the average market price. This figure represents a notable increase from 61.8 percent in the previous quarter.
While national home prices have experienced a slight decline, the skyrocketing cost of interest has more than offset any such decrease. RBC’s calculations reveal that the monthly mortgage payment for the average home valued at $796,300 surged by 3.3 percent to $3,990 in the last quarter alone.
The deteriorating affordability trend extends across all markets tracked by RBC, with Vancouver, Victoria, and Toronto facing the most severe challenges. However, Ottawa, Montreal, and Halifax are also witnessing affordability levels nearing historic lows.
Vancouver stands out as the epicenter of the crisis, where ownership costs devour a staggering 106.4 percent of the median income, making homeownership virtually inaccessible to all but the highest earners. Toronto follows closely, with affordability reaching its worst levels ever in the fourth quarter.
Even in Calgary, touted as Canada’s housing hotspot, affordability is eroding rapidly, with home prices surging at the fastest pace in the country.
Hogue warns that while a robust economy and population growth continue to fuel the housing market, declining affordability poses a significant risk to its sustainability. High interest rates are significantly constraining homebuyers’ budgets, shrinking their purchasing power by 22 percent since the Bank of Canada began hiking rates in 2022.
RBC anticipates that the Bank of Canada will initiate rate cuts by mid-year, providing some relief to homebuyers. However, meaningful improvements in affordability are expected to be gradual, with the share of household income needed for homeownership costs only returning to mid-2022 levels by 2025.
In conclusion, Hogue emphasizes that restoring affordability to pre-pandemic levels will likely be a prolonged endeavor, requiring years of concerted efforts in many of Canada’s major housing markets.