RBC warns about the worst housing affordability on record coming soon

According to RBC Economics, housing affordability in Canada fell to its worst level in 31 years at the end of the previous year. It also warns that we shouldn’t expect any relief in the nearest future.

The recent data shows that it took 49.7% of median pre-tax household income to cover mortgage payments and other costs connected with homeownership in Canada in Q4 of 2021. It’s 7.5% more than a year earlier and almost 9% more than the average number seen since 1985.

Housing affordability was even worse in case of single-detached houses, which RBC estimates could take 54.6% of median pre-tax household income.

“A sharp prices increase at the start of this year has already raised the level to incredible highs for many homebuyers,” – says RBC Assistant Chief Economist Robert Hogue.

“And with the central bank on track of raising interest rates (we expect an increase of at least 1.50% in the coming year), ownership costs may go even higher. Worst-ever affordability levels may appear, pushing buyers out of the market.”

It’s the second time that an economist from one of the largest Canadian banks has expressed concern over the national real estate markets.

Robert Kavcic from BMO Capital Markets believes there is a “full-scale attack on Canadian home prices” as interest rates go up and tax changes are seen in Nova Scotia and Ontario.

In addition to it, RBC’s Hogue admits there are certain “good reasons” for home prices growth, but the scale of this growth clearly went beyond what fundamentals would suggest in many areas of the country.

Homeowners in Vancouver face the most difficult conditions, with 73.9% of household income going toward servicing ownership costs in Q4, marking a 9% gain from a year earlier. Moreover, according to RBC estimates, 99.7% of household income would have gone toward ownership costs for a single-family detached house in Vancouver.

The forecasts for housing affordability look more and more challenging as the BoC aims at the inflation issue. Hogue warns that homebuyers are now more vulnerable to rate gains than previously. He says, in case the central bank raises its overnight rate by 1.5%, it will worsen the housing affordability by more than 7%.

“A hit from this level of change would significantly affect homebuyers and reduce the market demand sharply,” – he added.