“It’s never been so unaffordable to buy a home in this country,” says Robert Hogue, assistant chief economist at RBC Economics in his Housing Trends and Affordability report for December 2022..If you were hoping to buy, or sell, a home, it’s not the news you wanted to hear, but Hogie is just the messenger..The fault lies with the Bank of Canada and its management, some will say mismanagement, of its overnight interest rate, which it took to the lowest possible .25% at the onset of the pandemic and left it there for too long..With the rate now at 4.25%, most buyers are having to qualify for a mortgage at stress test rates as high as 7%, severely reducing those able to qualify, says Hogue..“To qualify for a mortgage on the purchase of a typical home, at the benchmark price, in the Vancouver area a buyer needed to earn a minimum of $200,000 annually in the third quarter of 2021,” he says. “A year later, the qualifying income had soared 34% to an astounding $268,000. In the Toronto area, it was $240,000, a 29% increase.”.“No wonder homebuyer demand has plummeted since the Bank of Canada initiated its rate hike campaign.”.The more challenging conditions aren’t limited to Canada’s most expensive markets. .“It’s in fact buyers in Halifax and Saint John who have faced the biggest increases in the minimum qualifying income in the past year, up 44% and 41%, respectively, though the required amount in Saint John, $74,000, is still the lowest among the markets we track,” says Hogue. “To qualify for a home valued at the benchmark price in Victoria, buyers need an annual pre-tax income of at least $216,000 to qualify, in Calgary $123,000, Ottawa $149,000, Montreal $127,000 and Halifax $116,000.” .“These levels widely exceed the respective median household income, which ranges from $74,000 in Montreal to $92,000 in Calgary.” .In other words, it’s Canadians in the upper income echelons who can afford an average home in these markets, especially so in Vancouver, Toronto and Victoria. ."Further interest rate increases propelled RBC’s aggregate measures to yet new record highs on a national basis, and in Victoria, Vancouver, Toronto, Ottawa and Halifax in the third quarter, with an increase in the measure representing a loss of affordability,” says Hogue. “Montreal’s measure is rapidly approaching that mark too. The situation isn’t as grim in other markets though affordability levels now look more stretched than usual in all but one market, that being Edmonton. The national aggregate measure rose in the past eight quarters.”.The housing market correction is likely approaching its final phase, says Hogue..“The massive erosion of affordability has kept Canada’s housing market on a major correction course since spring. Home resales have plummeted 36% nationwide, more so in BC (-43%) and Ontario (-41%), reaching levels far below those that prevailed before the pandemic,” he says. “The pace of decline has eased in recent months, though. Falling prices also appear to be slowing.”.Approaching the final phase, but not quite there..“Headwinds will remain stiff in the near term. Affordability issues aren’t likely to reverse quickly. It will take more time for the market to absorb the rise in mortgage rates. We expect the market to bottom out around spring,” says Hogue. .Price drops will eventually help affordability.The market correction’s silver lining, says Hogue, is it’s setting the stage for some affordability improvement in the year ahead and better affordability beyond that. .“We expect the national benchmark price to fall 14% from its early 2022 peak, providing significant scope to lower ownership costs once interest rates stabilize,” he says. “We think that could start in the early part of 2023, though the timing is poised to vary by market. Growing household income will partly drive the improvement process.” .“It will likely take years to fully reverse the tremendous deterioration that took place since 2021.”
