Home Mortgage

With the cost of home ownership rising sharply, RBC predicts the challenges of affordability for many years to come

Housing affordability in many major markets continued to deteriorate in the fourth quarter despite reductions in home prices.

And despite some relief expected if the Bank of Canada starts cutting interest rates later this year, RBC Economics predicts it will take “many years” before borrowers see any meaningful improvement in home buying.

For a median income household, it now takes a “stunning” 63.5% of that income to cover the costs associated with owning a median home, according to the latest data from RBC Economics. That’s up from 61.3% in the previous quarter.

It also found that the monthly mortgage payment—for a home with a median price of $796,300 in the nation’s prime housing markets—increased 3.3%, or more than $125, to an average of $3,990.

The RBC noted that the biggest deterioration in affordability was seen in the most expensive markets of Vancouver, Victoria and Toronto, while “the situation was more severe” in Ottawa, Montreal and Halifax.

A rate cut by the Bank of Canada is expected to help, but not immediately

The report’s author, RBC economist Robert Hogue, said the Bank of Canada’s rate cut expected later this year will be a “turning point” for purchases.

“We expect that lower borrowing costs will offset some of the larger losses during the crisis,” he wrote. “Any development in the year ahead, is poised to be modest and leave budget-conscious buyers wanting.”

And while he says the outlook will brighten as we head into 2025 as borrowers benefit from further BoC cuts, the improvement will not bring back the damage to affordability that was lost during the crisis when house prices hit record highs.

“Under our baseline scenario, the share of household income needed to cover the cost of ownership would only decrease to mid-2022 levels in 2025,” Hogue noted. “That’s not going to cut the price for a lot of potential buyers.”

Instead, meaningful improvements in affordability “will take years” in many of Canada’s major markets, he adds.

“In this context, we expect that the recovery of the real estate market will be slow at first, before gaining momentum as the rate of interest decreases,” he said.

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