RBC's report shows small improvements in affordability, but buyers still face significant hurdles
RBC economist Robert Hogue reports that while recent interest rate cuts by the Bank of Canada have improved housing affordability, the changes are minimal, as reported by BNN Bloomberg.
According to a report released Tuesday, RBC's affordability metrics ‘inched’ lower across Canadian markets in the second quarter, yet prospective buyers still face significant challenges.
The report highlights that buyers continue to struggle to find affordable homes due to the sharp price escalation and rising interest rates during the pandemic.
“Recent declines barely moved RBC’s affordability measures off worst-ever levels nationally and in many major markets,” the report notes.
Despite the modest improvement, Hogue expects this trend to continue, with further rate cuts providing additional relief for homebuyers in the coming months.
The Bank of Canada has reduced its overnight lending rate by 25 basis points at three consecutive meetings and has signalled its willingness to continue cutting rates if inflation keeps declining.
The report points out that the initial rate cut in June allowed more Canadians to qualify for mortgages, though the required income for doing so remained above the national average in the second quarter.
“Nationwide, it took an income of $155,000 to carry a mortgage on the $810,200 price tag of an average (benchmark) home in Canada (assuming a 20 per cent down payment, 25-year amortization and 39 per cent gross debt service ratio). That’s down from $161,000 at the end of 2023,” the report explains.
However, Hogue adds that “while encouraging, it’s still a giant hurdle to clear.”
In contrast, the income required to carry a mortgage in 2019 was $96,000—38 percent lower than in the second quarter of this year.
Hogue emphasizes that the current $155,000 figure “is almost double what the median household in Canada earned (which we estimate at $87,000). No wonder home resales have generally stayed dormant this year.”
Despite these obstacles, the report predicts that costs for homebuyers will decrease over the next several months. Hogue expects the Bank of Canada to lower its policy rate by another 125 basis points to three percent by spring, leading to lower mortgage rates.
The report’s base case scenario forecasts small increases in home prices, moderate drops in long-term interest rates, and steady, though slowing, growth in household incomes until the end of 2025.
Victor Tran, a mortgage, and real estate expert at RATESDOTCA, advises buyers to carefully consider their mortgage options as rates fall. In a statement to BNN Bloomberg, Tran notes that the lowest rates available “often come with restrictions that could offset the cost benefit of the lower rate.”
He advises that “lowest might not always mean it’s the best option for an individual homeowner’s circumstances.” Tran suggests reading the fine print of mortgage agreements to ensure they meet long-term expectations.
The federal government’s recent announcement to extend the amortization period for insured mortgages from 25 to 30 years for first-time buyers could also impact affordability.
However, Hogue points out the risks, stating, “The downside, of course, is borrowers would carry their mortgage debt for longer, and pay more in interest (and insurance premiums) over the life of the mortgage.”
Additionally, he cautions that “any large-scale take-up of this new option could potentially heat up prices in some market segments—and ultimately, defeat some of the hoped-for benefits of the measure.”
