Despite a rise in average home prices earlier in the year, strong income gains were enough to improve affordability in the second quarter, albeit only slightly. That’s according to RBC’s aggregate housing affordability measure, which fell by 0.3% to 59.5%. This means it takes 59.5% of the average household income to cover home ownership costs, down only slightly from the all-time high of 61.2% reached in Q3 2022. In this article, we will look into the dynamics of housing affordability in Canada, examining how income levels, interest rates, and regional variations impact the accessibility of housing for Canadians.
RBC’s Affordability Measure
The drop in RBC’s affordability measure was primarily due to a 1.4% quarter-over-quarter rise in household income. This income boost was sufficient to lower the ratio of ownership costs to median household income, offering a glimmer of hope for potential homebuyers. However, report author Robert Hogue cautions that this slight improvement may not significantly benefit homebuyers, especially as mortgage payments continue to rise due to higher home prices during the quarter and record-high interest rates.
Regional Disparities
While overall affordability showed a slight improvement, not all regions experienced positive changes. In Vancouver and Toronto, for instance, the situation continued to deteriorate. In these cities, it takes a staggering 97.5% and 79.6% of a household's income, respectively, to cover ownership costs. These astronomical figures highlight the immense challenges faced by residents in these high-demand real estate markets.
The Role of Interest Rates
Hogue notes that, although cooler resale activity and a rebalancing of demand-supply conditions may temper price appreciation in most of Canada in the near term, high interest rates will remain a significant hurdle for buyers. He suggests that it will require substantial interest rate cuts to make ownership costs considerably more affordable. However, based on RBC's forecasts, rate cuts by the Bank of Canada aren't expected until mid-2024 at the earliest.
Future Outlook for Housing affordability in Canada
Looking ahead, RBC predicts that affordability will deteriorate in the third quarter. The expected income improvements during this period are unlikely to offset the higher carrying costs resulting from elevated interest rates. Relief for buyers may only arrive in 2024 when prices and rates are projected to stabilize. The anticipated initiation of the Bank of Canada's rate cuts by the second half of that year is also expected to aid in this regard.
The Long Road to Housing Affordability
Despite any incremental improvements that may arise over the coming year, it will take years and concerted efforts to fully restore housing affordability in Canada. The crux of the matter lies in the need for a substantial increase in housing supply. Building new homes at a scale that can address the issue takes time, particularly in the case of large condo apartment complexes. Additionally, soaring construction costs and finite construction capacity pose challenges to creating units that ordinary Canadians can afford.
A Call for Action
In a recent report, the Canada Mortgage and Housing Corporation (CMHC) highlighted that to adequately meet demand, 3.5 million additional housing units need to be built on top of the 2.3 million units currently on track for completion by 2030. This underscores the urgency and magnitude of the situation, emphasizing the need for a collaborative effort from all stakeholders to address the housing affordability crisis in Canada.
Conclusion
Housing affordability in Canada is a complex issue influenced by various factors, including income levels, interest rates, and regional disparities. While there have been minor improvements in recent quarters, the road ahead remains challenging. Canadians continue to grapple with the dream of homeownership, especially in high-demand markets like Vancouver and Toronto. With concerted efforts, including increased housing supply and potential interest rate cuts, the nation can hope for a more affordable future in the housing market.
FAQs
What is RBC's housing affordability measure?
RBC's housing affordability measure calculates the percentage of the average household income required to cover home ownership costs.
Why did housing affordability improve in the second quarter? Housing affordability improved slightly in the second quarter due to a 1.4% rise in household income.
Which regions in Canada are experiencing the worst housing affordability challenges? Vancouver and Toronto are facing severe housing affordability challenges, with high percentages of household income needed to cover ownership costs.
When can Canadians expect relief in housing affordability? Relief is not expected until 2024, when prices and rates are anticipated to stabilize, and the Bank of Canada is likely to begin rate cuts.
What is the key factor in addressing housing affordability in Canada? Increasing housing supply is crucial to addressing housing affordability in Canada, but it will require concerted efforts and time to make a substantial difference.
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