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.
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