A new report from Robert Hogue of RBC Economics says recent drops of interest rates and home prices, slight though they may be, have led to a drop in home ownership costs. "These costs for an average of all housing types fell to 60.9% as a share of median household income from 63.8% in Q4 of 2023,” writes Hogue, adding, regardless, housing markets are still close to their worst affordability ever. “Soaring prices and interest rates during the pandemic continue to seriously constrain homebuyers. The slight relief last quarter reversed just a fraction of the massive deterioration in affordability.” But it’s a step in the right direction. "We think ownership costs have room to fall further in the period ahead. In June, the Bank of Canada initiated what we expect will amount to a full two percentage-point cut in its policy rate to 3% by the end of 2025, which will bring down long term rates as well, but to a lesser extent,” says Hogue. One of the largest barriers to entering the market is the price of admission, the downpayment, which has shot up significantly says Hogue. "The minimum downpayment for a starter home in Canada, a condo apartment, has ballooned 40% since the end of 2019. The smallest amount a buyer with an insured mortgage could put down to purchase an average condo valued at $574,500 in Q1 was $32,500 (5% on the first $500,000 and 10% on the value between $500,000 and $999,000).” “This represents a hefty 38% of the annual pre-tax income for a typical median household or six percentage points more than before the pandemic, and 12 percentage points more than a decade ago.” “It will take time — and several interest rate cuts — for the weight of ownership costs to lighten sufficiently enough to spur many potential buyers into action,” adds Hogue. “In our base case scenario, home prices will see small increases, longer-term interest rates will moderately drop and household income will grow steadily but see diminishing gains until the end of 2025.” RBC measured the amount of household income required to cover ownership costs of an average home Canada’s six largest markets. Here are the results, from west to east. Vancouver RBC says only a select few high-income earners can afford to buy, or that considerable wealth must be amassed (or received) to put down towards a purchase. A whopping 100.9% of a median income is needed to cover ownership costs of an average home, a share that came down 4.5 percentage points in Q1 but did little to turn things around. Vancouver’s housing market remains soft with prices largely flat (albeit at lofty levels). We expect this to continue in the near term. Calgary At 43.5% of median income required in Q1, the measure compares well to other major markets in Canada, which has likely contributed to explosive migration flows to the city. Home resale activity continues to be brisk but eased slightly since late last year. A lack of supply is no doubt an increasingly restraining factor. We see little that would threaten the market’s vitality in the near term even if the upside from here is limited. Edmonton Momentum in Edmonton is very strong with housing affordability comparing even better than Calgary’s and population growth also at historic highs. RBC’s aggregate affordability measure was 35.5% in Q1, down 0.7 percentage points from Q4. High sales activity has reduced supply and home prices are rising at a moderate pace but could pick up more rapidly if supply-demand conditions remain so tight for longer. Toronto RBC’s aggregate affordability measure stood at a 78.9% — an impossible hurdle for many — especially among those looking to own for the first time. The completion of several condo projects brought many units to market. Prices could come under heavier downward pressure if this trend persists. Still, it would take a sizable price drop along with meaningful interest rate cuts to change the outlook for buyers. Ottawa The Ottawa market has been slow this year, with home sales around 20% below pre-pandemic levels and little movement in prices. RBC’s aggregate measure just came off its worst point ever in Q1 when ownership costs for an average of all housing types took up 49.6% of the median household income. Montreal Spring activity was light as potential buyers contended with onerous ownership costs and wondered about the timing and size of future interest rate cuts. RBC’s aggregate affordability measure, 50.6%, has been firmly stuck near a decade’s high over the past four quarters. Slow turnover put inventories on an upward trajectory but the rise is gradual and the size still smaller than it was before the pandemic.
