Canadian homebuyers face the least affordable market in a generation

  • Too high rates and high interest rates undermine affordability: RBC Canada’s overall affordability measure rose 3.7 percentage points to 54.0% in the first quarter of 2022 — the worst level of affordability since the early 1990s. Ownership costs have risen in every market we track, although the degree of pain buyers feel varies widely across the country.
  • The situation in Vancouver, Toronto and Victoria reaches its extreme: It is now very difficult to become a homeowner in other parts of southern Ontario and the Lower Mainland of British Columbia.
  • The prairie and some East Coast markets still boast relatively affordable conditions: Despite deteriorating trends, buyers in these areas can still generally manage (albeit to a lesser extent in Halifax).
  • Affordability is expected to get worse before it gets better: The Bank of Canada’s “robust” rate hike campaign will further inflate costs of ownership in the near term, setting RBC’s national affordability meter on track to reach all-time worst levels. However, we see the booming correction in the prices finally brings some relief to the buyers. And property values, which are already declining, are likely to fall by more than 10% in the next year.

The disproportionate effect of higher interest rates

Interest rates are back on the rise after dropping to historic lows during the pandemic. This is a game changer for the Canadian housing market, which has seen prices rise on the back of falling prices. In March, the Bank of Canada kicked off a hiking cycle that we expect will culminate with a 250 basis point increase in its policy rate by fall. And as of June, half of that has yet to come.

The higher rates will affect virtually every buyer across the country, hitting them with steeper monthly mortgage bills and making it harder to get real estate. But buyers in more expensive markets will face an even greater challenge. Higher property values ​​- and more importantly, larger corresponding mortgage sizes – increase sensitivity to interest rate movements. For example, a 1 percentage point rate increase increases mortgage payments by more than $600 per month in Vancouver, $554 in Toronto, and $481 in Victoria, based on typical home prices in the first quarter ($1.4 million and $1.3 million). and $1.1 million (respectively). These numbers far exceed the average rise of $360 a month in mortgage rates in Canada. John’s, Regina, and other more modestly priced markets are considerably less sensitive, with increments ranging from $125 to $160 a month.

The impact on affordability is also uneven. An increase in the RBC affordability scale represents a deterioration in affordability. A 1 percentage point increase in interest rates causes the aggregate measure in Vancouver (8.8 percentage points), Toronto (7.8 percentage points), and Victoria (6.4 percentage points) higher than the national average (5.5 percentage points). While real estate appreciation has led to increased sensitivity in many prairie, Quebec and Atlantic Canada markets, the loss of affordability resulting from higher prices remains significantly lower in those areas than the national average.

Affordability to get uglier in Vancouver, Toronto and Victoria

This is bad news for buyers in Vancouver, Toronto and Victoria who face additional pressure on affordability as the Bank of Canada advances its campaign to raise interest rates. RBC’s aggregate metrics are likely to head deeper into record territory in all three markets, indicating a deepening crisis of affordability. The pressure is also set to intensify financially for Montreal and Ottawa and to a lesser extent for Halifax house hunters, whose prospects are already the toughest in decades.

Canadians will not easily give up their dream of ownership

Extremely high prices and rising interest rates pose huge (and growing) obstacles for Canadian homebuyers. However, many will pursue every possible avenue to preserve their dream of ownership, primarily by adjusting their preferences (housing type, location, mortgage amortization period) and seeking additional support (additional rental income, parental assistance for a down payment, and multigenerational family devices). We believe that these coping mechanisms will mitigate the impact of higher interest rates on housing demand.

But something – prices – we have to give

These mechanisms can only do so much. Affordability tensions have already reached unsustainable levels in Ontario and British Columbia, and are likely to become unsustainable in other parts of the country. This will significantly cool demand, rebalance market conditions and put downward pressure on prices – a process that began this spring.

What could turn the tide on affordability in a higher rate environment? Rapid growth of family income and lower prices. The recent acceleration will help increase wages but we believe the most likely factor to move the needle is a price correction. We now expect the Canadian benchmark to fall more than 10% from peak to trough next year, with more significant drops of 13% in British Columbia and Ontario. We expect a relatively smaller decrease in the rest of the country – between -2% and -5% (peak to bottom) in the Prairies, about -7% in Quebec and between -6% and -9% in Atlantic Canada.


Read the full Housing and Affordability Trends report for a comprehensive market-by-market analysis.

Robert Hogg is a member of the Macro and Regional Economic Analysis Group, with RBC Economics. He is responsible for providing analysis and forecasts for the Canadian housing market and the provincial economies. His publications include housing trends and affordability, regional forecasts, and commentary on the provincial budget.

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This article is intended for general information only and should not be relied upon as legal, financial or other professional advice. A professional counselor should be consulted regarding your particular situation. The information provided is believed to be factual and current but we do not guarantee its accuracy and should not be considered a complete analysis of the topics discussed. All opinion statements reflect the authors’ judgment as of the date of publication and are subject to change. No third party’s endorsement, advice, opinions, information, products or services is made express or implied by Royal Bank of Canada or any of its affiliates.

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