According to a Sept. 28 report released by RBC Economics and economist Robert Hogue, income growth of 1.4 per cent from the first quarter nationwide helped reduce the ratio of homeownership costs to median household income, signalling a slight improvement in housing affordability.
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RBC says its aggregate affordability measure fell for the second-straight time by 0.3 percentage points to 59.5 per cent.
Income growth balances rising costs
The report highlights that while changes in home prices and interest rates often dominate discussions about affordability, the positive impact of increasing household income should not be underestimated.
Hogue says the last time income had a notable effect on RBC’s affordability measure was during the early stages of the pandemic when government support programs provided financial relief to Canadians grappling with lockdowns.
Near-term outlook paints a challenging picture
Despite the recent income boost, the report suggests that affordability is likely to deteriorate in the third quarter due to higher mortgage rates and continued price appreciation. However, a glimmer of hope emerges on the horizon, with expectations of an improving trend in 2024, particularly after the Bank of Canada potentially cuts rates, which Hogue expects will be “around mid-year.”
In Canada’s major markets, prospective buyers continue to face significant affordability challenges. “We believe those pressures are behind the notable cooling in home resale activity we saw this summer in Ontario and British Columbia. They are poised to weigh on demand for months to come in both regions, with many buyers entirely priced out in Vancouver and Toronto,” the report reads.
Hogue expects demand will also cool in other parts of Canada with the “possible” exception of the Prairie markets, including Calgary, where buyer confidence still appears strong.
Long-term solutions needed
The report underscores that restoring housing affordability in Canada will be a slow process, barring a significant housing market crash or a sudden shift in monetary policy.
The economist writes, “Supply must increase by giant leaps to make a material difference. But building new homes takes a long time—up to several years in the case of large condo apartment complexes. And it’s increasingly hard to build units ordinary Canadians can afford to buy given soaring construction costs and finite construction capacity.”
Hogue notes the recent cut to the GST on new apartment projects is a step in the right direction, but significantly boosting investment in affordable rental housing is crucial to addressing the pressing needs of struggling Canadians.
Read the full report from RBC Economics, including regional breakdowns.