Rising home ownership costs in Vancouver, Toronto and Victoria pushed overall housing affordability in Canada to its worst level since the end of 1990 in the third quarter of 2017, according to the latest Housing Trends and Affordability Report issued by RBC Economics Research.
“While the deterioration of affordability conditions was broadly based across the country, it was developments in Vancouver Toronto and Victoria that had the greatest impact on the national scene,” said Craig Wright, Senior Vice-President and Chief Economist at RBC. “These three markets were the only ones with affordability measures exceeding the national average.”
RBC’s aggregate measure for affordability in Canada rose for the ninth consecutive quarter to stand at 48.7 per cent in the third quarter. Housing affordability is calculated as the share of household income that would be required to carry the costs of owning a home at market price. A higher number means ownership is less affordable.
The Vancouver area experienced the sharpest affordability drop among Canada’s major markets, reaching a new record high for the measure for any market in Canada at 87.5 per cent (up from 82.6 per cent in the second quarter). Meanwhile in Toronto, the affordability measure rose for the 13th consecutive quarter to a record-high 78.4 per cent for the area (up from 77.1 per cent in the second quarter).
“The continued erosion in affordability in Toronto was a disappointment,” said Wright. “There was scope for some improvement given the significant cooling in resale activity since April’s Fair Housing Plan but all we got was the slimmest rise in ownership costs in two years.”
In Victoria, affordability continued to deteriorate with RBC’s aggregate measure reaching a record-high of 61.5 per cent for the area (up from 58.8 per cent in the second quarter), recording the second-largest increase relative to a year ago among the markets tracked by RBC. Despite the deterioration, Victoria’s vibrant economy with steady job creation and one of the lower unemployment rates of the country will continue to lend support to the housing market.
While the national affordability picture is skewed by developments in the country’s most expensive markets, the deterioration was generalized in the third quarter with RBC’s measures rising in all markets except Saint John. In both Ottawa and Montreal, affordability worsened with the aggregate measures trending increasingly above their respective long-run averages. In the Prairies and the Atlantic region, however, affordability isn’t as much an obstacle to home ownership as other economic factors.
Higher interest rates could have significant implications for housing affordability in Canada. We expect the Bank of Canada to build on the rate increases it made in 2017 by hiking its overnight rate three times in 2018. All markets would be affected, but the effect would be particularly amplified in high-priced markets.