Canadian housing affordability has reached its worst level in 28 years with the most severe challenges in Toronto, Vancouver and Victoria, says a report from RBC.
“Unaffordability is off the charts,” in the country’s most expensive markets and the situation is expected to further deteriorate as interest and mortgage rates rise, says the bank.
In Toronto, the average household would need to spend 75.9 per cent of its income to cover the cost of owning a home, says RBC. That compares to a Canadian average of 53.9 per cent, up from 43.2 per cent three years ago.
Condo affordability in Toronto, considered the city’s most viable entry-level home option, has eroded even more than detached houses in Canada, according to the report.
The worsening picture comes as higher interest rates have raised mortgage carrying costs.
The report comes as the Union Bank of Switzerland has identified Toronto and Vancouver among a list of cities, including Hong Kong, London, Munich and Amsterdam, that are vulnerable to a housing bubble.
Despite the high cost of housing, 68 per cent of Torontonians own, not rent, the third highest rate in the world after Oslo, Norway and Calagary, according to Canadian Centre for Economic Analysis.
But the affordability challenge is so severe, the region is going to be forced to get creative so people can live here, said Cherise Burda, executive director of the Ryerson City Building Institute.
“Toronto is becoming a worldclass city, but we still think we’re a small town, where everybody can afford to buy a detached house with a white picket fence,” she said.
Burda cited an Urbanation study showing condo investors are struggling to achieve positive cash-flow. At the same time, she said, young people are finding it more affordable to split the rent on a $2,500 two-bedroom apartment than to buy a one-bedroom condo and that could take some of the steam out of the market.
“We need to think about making rental more attractive. It has a stigma here,” she said, comparing it with some European cities.
RBC notes that Toronto saw some short-term relief late last year and early this year, but the housing market has since resumed its climb.
The Toronto Real Estate Board reported the average price of a re-sale detached home in the region was $1.24 million in August. A newly built house cost $1.13 million on average last month and a new condo cost $784,152, according to the Building and Land Development Association.
But, the bank said, “the deterioration isn’t so much that prices appreciated … but, rather, because higher interest rates raised mortgage carrying costs.”
RBC predicts that affordability levels will continue to decline as interest rates rise, but increases in household income should soften the blow for buyers.
The last time RBC’s affordability index showed a similar jump was around 1990 when the prime lending rate was 14 per cent compared to RBC’s current prime of 3.7 per cent.
Owning a home in Vancouver costs 88.4 per cent of the average household income, said RBC. Senior economist Robert Hogue called it a “never-before-seen rate” of unaffordability in Canada. “Calling it a crisis is no exaggeration,” said the bank.
Files from Canadian Press