Canadian Real Estate Affordability Is At Crisis Levels, But Falling Prices Will Help

Dated: December 29 2018

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RBC: Canadian Real Estate Affordability Is At Crisis Levels, But Falling Prices Will Help

Canada’s largest bank believes real estate affordability will continue to deteriorate. RBC Economicsupdated their Affordability Index for Q3 2018. The index, which shows how much a household would pay for a mortgage, printed one of the worst levels in history. Analysts from the bank expect affordability to get worse in 2019, as interest rates rise. However, they did mention the decline in affordability will be mitigated by falling prices.

RBC Affordability Index

The RBC Affordability Index is one of the many indexes that compare how much it costs to own a home. The index presents the ratio of income median households need to use to buy a house today. They use a five year fixed rate, assuming a 25 year amortization, and a 25% down payment. There’s a few notes you should also remember that help us understand why this data is useful.

A lot of people look at this number and think, “OMG – Canadians are paying how much of their income?!” No, the vast majority of Canadians bought before the spike in prices. This means the lion’s share of households are minimally impacted by a rise in servicing costs. Heck, most banks wouldn’t lend someone the money if they needed to spend more than 50% of their income on debt service.

Instead, the takeaway is in regards to liquidity. The higher the servicing costs, the smaller the pool of qualified buyers. Illiquid assets tend to experience wild swings in prices, not all positive. This is actually pretty obvious if you look at the index. The peaks aren’t elevated for more than 3 years, without a correction and recession.

Canadian Real Estate Is The Least Affordable Since 1990

The affordability index for Canadian real estate held its level for a second quarter. A median household in Canada needed 53.9% of their income in Q3 2018, the same as the previous quarter. That number represents a 3.05% increase compared to the same quarter last year. While high, we’re still under the peak level of unaffordability established in Q2 1990.

Canadian Real Estate Affordability (RBC Index)

The percent of income required by a median household to service mortgage debt on a conventional mortgage across Canada.

1985 Q11986 Q11987 Q11988 Q11989 Q11990 Q11991 Q11992 Q11993 Q11994 Q11995 Q11996 Q11997 Q11998 Q11999 Q12000 Q12001 Q12002 Q12003 Q12004 Q12005 Q12006 Q12007 Q12008 Q12009 Q12010 Q12011 Q12012 Q12013 Q12014 Q12015 Q12016 Q12017 Q12018 Q1010203040506070Percent
QuarterAggregateDetachedCondoRecession
1985 Q141.542.433.2
1985 Q239.340.331.5
1985 Q338.339.230.8
1985 Q438.239.130.9
1986 Q138.539.431.1
1986 Q236.737.630
1986 Q337.938.930.8
1986 Q438.739.731.5
1987 Q137.538.530.9
1987 Q240.741.833.9
1987 Q342.643.735.6
1987 Q442.84436
1988 Q142.343.535.8
1988 Q242.543.636.3
1988 Q345.146.438.3
1988 Q445.747.139
1989 Q146.948.340.5
1989 Q247.54940.9
1989 Q345.747.139.9
1989 Q446.848.340.8
1990 Q150.351.944.6
1990 Q25657.949.8
1990 Q352.654.346.5
1990 Q450.151.843.9
1991 Q145.647.339.170
1991 Q24546.738.770
1991 Q345.947.739.470
1991 Q443.244.937.170
1992 Q142.444.336.4
1992 Q242.344.236.4
1992 Q33940.833.3
1992 Q441.343.235.2
1993 Q141.343.335.3
1993 Q240.842.834.7
1993 Q340.342.334.3
1993 Q438.440.532.4
1994 Q137.839.931.7
1994 Q243.645.936.5
1994 Q344.747.137.1
1994 Q443.946.436.5
1995 Q14446.436.5
1995 Q239.842.132.9
1995 Q339.241.532.1
1995 Q438.74131.6
1996 Q137.439.630.4
1996 Q238.540.931.2
1996 Q337.639.930.5
1996 Q434.937.228.2
1997 Q135.437.728.6
1997 Q236.138.429.2
1997 Q335.537.728.5
1997 Q435.137.428.3
1998 Q13537.328.3
1998 Q234.937.228.1
1998 Q335.437.728.5
1998 Q434.636.927.9
1999 Q134.736.927.9
1999 Q235.137.428.3
1999 Q336.238.628.8
1999 Q437.539.929.8
2000 Q138.54131
2000 Q238.440.830.5
2000 Q337.840.230.3
2000 Q437.740.129.8
2001 Q136.438.729
2001 Q236.438.629
2001 Q336.238.429
2001 Q43537.427.9
2002 Q136.338.729.2
2002 Q237.139.629.9
2002 Q33638.529
2002 Q436.438.929.3
2003 Q136.53929.9
2003 Q23638.629.4
2003 Q336.839.430
2003 Q437.740.530.8
2004 Q136.539.229.9
2004 Q238.641.531.7
2004 Q338.941.832.1
2004 Q438.641.532
2005 Q138.641.632
2005 Q238.441.331.8
2005 Q338.841.631.9
2005 Q440.243.232.9
2006 Q141.244.333.5
2006 Q242.84634.9
2006 Q343.947.435.7
2006 Q443.847.335.6
2007 Q143.847.335.6
2007 Q245.44936.9
2007 Q347.351.138.6
2007 Q448.852.740.1
2008 Q148.352.139.7
2008 Q246.550.238.1
2008 Q346.45038
2008 Q447.250.838.7
2009 Q142.345.634.870
2009 Q24144.133.670
2009 Q342.645.93570
2009 Q443.446.835.870
2010 Q143.947.436.1
2010 Q246.149.937.7
2010 Q344.648.436.2
2010 Q443.847.635.4
2011 Q143.947.735.4
2011 Q244.948.836.1
2011 Q344.748.635.7
2011 Q444.248.135.2
2012 Q143.647.434.7
2012 Q243.647.334.5
2012 Q343.847.634.4
2012 Q443.647.634.2
2013 Q143.347.233.9
2013 Q243.247.233.8
2013 Q344.248.234.5
2013 Q444.548.634.6
2014 Q143.547.633.7
2014 Q241.945.832.3
2014 Q342.446.232.6
2014 Q44346.933
2015 Q143.347.333.1
2015 Q243.247.232.8
2015 Q343.84833.1
2015 Q444.74933.6
2016 Q145.650.234
2016 Q246.851.634.4 Blog author image

Steven Axford

Steve Axford grew up in Victoria, BC and has always been active in his community. Steve is a Victoria Cougars Hockey Team alumni as well as a Victoria Shamrocks (intermediate) alumni. During his time....

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