It keeps getting less affordable to own a home in Canada

• No relief in the third quarter: RBC’s affordability measure deteriorated to its worst level in Canada since 1990. It would have taken 53.9% of a typical household’s income to carry the ownership costs of average home bought last quarter. This is up 1.5 percentage points from a year ago.
• Rising interest rates still the main culprit. Mortgage rates increased for a fifth straight quarter and accounted for the entire rise in RBC’s aggregate measure for Canada over that period.
• Affordability at crisis levels in Vancouver and Toronto but eroded most in Montreal in the third quarter. Home prices continued to rise at a brisk pace in Montreal, whereas they were flat at best in Vancouver and Toronto.
• The outlook isn’t promising. We expect that further interest rate hikes will keep upward pressure on ownership costs in 2019. Softening prices in key markets and rising household income increases will provide some offset, however.

Are only the rich able to buy a home these days?

That certainly looks like it in Canada’s most expensive markets. Buyers in Vancouver, Toronto and Victoria needed between two and three times the median household income to qualify to purchase an average home. In Vancouver, for example, the income necessary to cover ownership costs and clear the mortgage stress test was $211,000 in the third quarter. This is clearly at the higher end of the income scale. The qualifying income was $167,000 in Toronto and $154,000 in Victoria. What’s perhaps more troublesome is the extent to which the qualifying income increased over the past three years. In Vancouver, it surged by $84,000 (or 66%), whereas it rose by $64,000 in Toronto and $68,000 in Victoria. No wonder so many buyers fear that their ownership dream is slipping away in those markets. Price increases accounted for a big part of the increases. Since the third quarter of
2015, higher prices added between $27,000 (Toronto) and $34,000 (Vancouver) to the qualifying income. But this year’s stress test—which required mortgage borrowers to qualify at a significantly higher interest rate than their offered rate—raised the bar by at least as much. In Vancouver, for example, the stress test added almost $36,000 to the qualifying income needed to buy an average priced home ($1.1 million). The amounts were $27,000 in Toronto (for an average home of $857,000) and $25,000 in Victoria ($813,000). And the other major implication of the stress test is that it was felt across the country—in contrast to price increases which primarily impacted Canada’s expensive markets. Thousands of dollars more in income are now needed to buy a home with a mortgage in every market across the country because of the stress test.