Canadian housing affordability is now at its worst level since 1990

Canadian housing affordability is now at its worst level since 1990.

RBC Housing Trends and Affordability report, released last week, provided an overview of Canadian housing affordability trends of several decades. A rise in
interest rates is putting a squeeze on housing affordability.

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The comprehensive report warned readers that housing affordability is becoming worse in Canada. The costs of ownership for a property bought in the second quarter of 2018 in Toronto are now at 53.9 per cent of a typical household income. Housing affordability measure is calculated as a share of household income. The higher the share, the less affordable it is to buy a home.

The report states that housing affordability is now at its worst since 1990. Skyrocketing home prices in largest metropolitan areas like Toronto and Vancouver certainly affected the trend. However, RBC states that it’s the rising interest rates that pushed the affordability measure to its record high. Increases in mortgage rates require a larger share of a typical household’s pre-tax income to cover the mortgage payments.

The increase in home prices does not correlate with the increase in household incomes. The question is, how are Canadians able to keep buying homes, if rates go up, yet incomes do not? To answer in short, it’s the cheap credit and mortgage regulations, which allowed for excessive borrowing.

How mortgage rates affect the economy

When mortgage rates are low, they boost price inflation and worsen housing affordability. When prices become higher, increase in mortgage rates follows. This further worsens affordability, because carrying costs are dependant on lending rates.

Low mortgage rates of the recent years, as well as the increase in the size of mortgage loans, and the ability to stretch a mortgage to 40 years meant that buyers with modest incomes could purchase expensive homes. It turned out, that home purchases in Canada went hand in hand with increases in household debt. The household debt recently reached two trillion dollars.

Provincial governments did try to turn the situation around by introducing several measures to improve household affordability. Stress tests introduced in 2017 were meant to slow down home price increase. However, this had a moderate effect on housing affordability.

Cheap credits are disappearing from the market. The true effect of increasing mortgage rates will be felt later, when borrowers will return to renew their mortgages at higher rates. Some experts believe that the situation hasn’t been this bad since early nineties. Back then mortgage rates were in double digits and home affordability was record low.

Further rate increases are expected in the near future, however overall they are still relatively low, compared with historic levels. Therefore, we do not expect a major turn for the better in housing affordability.

Biggest challenge for homebuyers in the upcoming season

Interest rates are expected to go up in the next several months. Getting a mortgage will become more of challenge for home buyers. If you are planning to buy a home but you are struggling to get a mortgage, do not feel discouraged. With proper guidance and preparation home ownership is still a possibility. We have resolved many difficult cases in the past, occasionally working with our clients for up to a year to get a successful result. If you are in a dire situation and not able to get a mortgage, make sure to work with an experienced professional who will review your case with your and provide proper guidance. Give us a call today for more information.

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