As interest rates decline, housing markets are becoming slightly more affordable — although markets such as Vancouver and Toronto remain extremely strained, says RBC Economics.
In a report Tuesday, the bank’s assistant chief economist noted that the costs of home ownership — including mortgage payments, property taxes and utilities — as a share of median household income dropped a bit in the second quarter, as interest rates began to ease.
Overall, home ownership costs as a share of income declined to 59.5% in the second quarter of 2024, down from 61% in the first quarter of 2024 and 63.7% in the fourth quarter of 2023.
“The start of 2024 marked a turning point for housing affordability in Canada,” the report said. “Home prices flattened (or fell marginally in some markets), while fixed mortgage rates eased in anticipation of central bank rate cuts and workers sustained solid wage increases. These developments finally halted the historic runup in homeownership costs that took place during the pandemic.”
In the second quarter, this improvement continued, and it was broad based, the report said. It noted that affordability improved in all of the markets the bank tracked, except for Saint John, N.B.
As the Bank of Canada began lowering rates in the second quarter, it became a bit easier to qualify for a mortgage, the report said.
Nationally, households would need an annual income of $155,000 to afford a mortgage on an average home in the second quarter, RBC reported, which was down from $161,000 at the start of the year.
“While encouraging, it’s still a giant hurdle to clear,” the report said.
Prior to the pandemic, that number was $96,000, the report noted, adding that the median household income is estimated to be around $87,000.
Despite the recent improvements in affordability, many housing markets remain severely strained.
For instance, the income needed to afford the average home in Vancouver is $273,000, in Toronto it’s $226,000, and Victoria is a close third place at $210,000.
Despite strong declines in the cost-to-income ratio in Vancouver, that market is still in “crisis territory, the report said, with the share of median income consumed by home ownership costs still sitting at 98.6% in the second quarter.
In these sorts of markets, “Buyers continue to struggle to find a home they can afford in the aftermath of massive price escalation and spike in interest rates during the pandemic,” the report said.
Nevertheless, affordability is expected to continue improving as interest rates continue to decline in the months ahead.
“The Bank of Canada is firmly engaged in normalizing monetary policy, and we expect further rate cuts will bring more relief to homebuyers in the coming months,” the report said. “Steady gains in household income will also help, along with upcoming regulatory changes allowing first-time homebuyers to choose 30-year amortization on insured mortgages.”