How affordable is it to own a home in Canada? With all the talk about rising home prices and the fact that interest rates are going to rise soon, it seems housing affordability is slipping beyond our reach. And according to Royal Bank’s housing affordability index, a report released Tuesday, it is – at least in most major Canadian cities.
Craig Wright, RBC’s chief economist, released a statement along with the report saying, “It became a little tougher on household budgets to carry the costs of owning a home at market prices at the start of this year. Strong buyer demand was a principal driver of the modest rise in home ownership costs. While the deterioration in affordability was felt to varying degrees across the country, it was mild in most cases.”
The index uses an average home price of $360,500 for a 1,200 bungalow, and assumes an annual qualifying income of $77,900. According to the index, in order to make mortgage payments the homeowner would need to spend 43.1 per cent of their annual income on housing costs – well above the recommended 30-35 per cent that should be spent. Of course, that’s a national average and when broken down by city, the figures can be quite different.
In Vancouver, these stats showed that home ownership costs rose 3.1 points to 88.9 per cent, the highest rise on the index in the whole country. Here in Canada’s priciest market, RBC says that a homeowner would need an annual income of $155,900 to make payments on a mortgage priced at $832,600 (and yes, that’s how costly a bungalow is in Vancouver.)
Not surprisingly, it’s not a whole lot more affordable to own a Toronto mortgage than it is a Vancouver loan, according to the index. In Canada’s second-largest city (and second-priciest) the index rose by 1.2 points, going up to 53.4 per cent based on an annual income of $110,000.
Owning an Ottawa mortgage isn’t as expensive, but affordability still fell in the nation’s capital, with points on the index up 0.9 points to show that homeowners would need to use 41.8 per cent of their annual income of $88,800 to afford a home.
The two cities to either improve or maintain their status on the index were Calgary and Edmonton. Calgary’s 36.7 per cent of pre-tax income needed for housing costs remains the same as the study showed last year; and Edmonton saw an improvement of 0.4 points on their own index, bringing them down to 32.4 per cent. This is due to a few factors, but one of the biggest being that qualifying income was lower in both of these cities.
Mr. Wright of RBC also said along with the report that affordability is only going to become an even bigger issue once interest rates rise.
“Exceptionally low interest rates have been the key force in keeping affordability from hitting dangerous levels in Canada in recent years,” he said. “Affordability headwinds are likely to increase next year, as interest rates make their way towards more normal levels.”