RBC: How Have Higher Interest Rates Affected Housing Affordability in 2018

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According to RBC’s latest Housing Trends and Affordability Report, rising interest rates at the end of 2017 have taken a bite out of Canadian housing affordability in the first quarter of 2018.

The average Canadian household put 48.4% of their income towards housing costs in 2018. This ratio is the highest it has been in decades.

Whenever the income to housing costs ratio rises, it constitutes a loss of affordability.

“Higher mortgage rates were the main contributor to the rise in ownership costs. With the prospect of more interest rate hikes in the period ahead, there’s a definite risk that affordability will erode further in the coming year. The odds of this occurring will also depend on the degree to which household income increases.” says Craig Wright, Senior Vice-President and Chief Economist at RBC.

While erosion of housing affordability has been significant in Vancouver and Toronto, the rest of Canada has seen relatively smaller changes in their markets.

Montreal faced its third consecutive rise in its income to housing costs ratio, reaching its highest point since 2011. The average homeowner in Montreal spends 43.7% of their income on homeownership costs.

According to RBC, Montreal’s ratio is not considered problematic yet, but the city is experiencing “some degree of stress.”

Montreal’s housing market continues to demonstrate solid momentum and steady appreciation in the first quarter of 2018. As prices grow affordability is bound to take a hit, especially in certain areas of Montreal.

RBC’s aggregate measure for Montreal rose for the ninth time in the past 11 quarters. The last increase of 0.4 percentage points brought the measure to a seven-year record high. This hints at potential tension in the residential market, especially in the single family home segment where sellers are currently favoured.

That being said, sales have been increasing in the GMA and there is very little evidence that buyers are significantly impacted by affordability issues.

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