Real estate prices have been rising faster than inflation in many parts of Canada, but a quarterly survey by RBC Economics found that in fact home ownership became slightly more affordable in the third quarter of this year thanks to increasing household incomes, low interest rates and lower utility costs in some markets.
RBC’s housing affordability measure looks at the amount of a median household’s monthly gross income that would be required to cover home ownership costs including a mortgage, property taxes and utilities. The Measure assumes a 25 per cent down payment and a 25-year mortgage loan at a five-year fixed rate, looking at three types of properties: standard condominiums, two-storey homes and detached bungalows.
The most affordable type of property nationwide remains condos; in July to September of this year, owning a condo would have cost 27.1 per cent of the median household’s income, down .3 percentage points. (However, we should note that condos carry monthly maintenance fees that a traditional house doesn’t; it’s not clear if this was factored into RBC’s calculations.) Nationwide, two-storey homes were at 47.8 per cent (down 0.2 percentage points) and detached bungalows were at 42.6 per cent (up a tenth of a percentage point, interestingly).
Of course, these numbers cover all markets across Canada, and affordability is much tighter in big cities like Vancouver and Toronto, as the report notes. A typical detached bungalow in Vancouver would eat up more than three quarters (83.6 per cent) of a typical household’s pretax income, a debt-to-income ratio that most lenders would not consider reasonable. That detached bungalow in Toronto would take just over half (56.3 per cent) of a typical household’s income. This is well above the conventional wisdom that housing costs should not exceed roughly a third of household income and buyers in both markets would likely need higher than median income to qualify for a mortgage.
The report goes on to say that aren’t many signs of affordability stress outside of these two markets. However, if mortgage rates increase that has the potential to stress housing affordability for some buyers. In the RBC report, the bank predicts that “the combination of gradually increasing interest rates and higher home prices would work to reverse the improvement in housing affordability that took place in the past year and weigh more heavily on homebuyer demand in Canada.”
