Housing affordability to worsen in 2019 even as market cools, says RBC

Even as house prices dip or rise only modestly in 2019, home affordability will decline in most Canadian cities, according to a recent report from the Royal Bank of Canada. 

The cost of home ownership relative to median incomes will continue to rise, RBC said, forecasting higher interest rates will make carrying a mortgage more expensive. 

In the country's biggest market — Toronto — the cost of owning a home will take up 79 per cent of the median household income of $71,631 by the fourth quarter of this year, up from nearly 76 per cent in 2018.

Meanwhile, house prices are expected to rise 0.5 per cent in 2019 as sales increase 5.6 per cent, according to RBC Economics Research. On Friday, the Toronto Real Estate Board said the average selling price for all types of property in the Greater Toronto Area fell by 4.3 per cent in 2018 to $787,300.

Vancouver the least affordable

In Canada's most expensive market — Vancouver — house prices are expected to fall another 2.5 per cent this year, while sales remain flat. On Thursday, the Real Estate Board of Greater Vancouver said the benchmark price for a home, which is a composite of detached properties, townhomes and condominiums,  fell by 2.7 per cent in December 2018 compared to the previous year.  

But, the cost of owning a home in that city is expected to remain at 88 per cent of the median income of $77,410 in the fourth quarter of 2019, similar to 2018. 

The bank said that policy-makers likely gave themselves "high marks" for guiding the country's housing market to a soft landing last year, but there's been no improvement in affordability.

Many people will be shut out of the housing market as a result, particularly first-time buyers, the report said.

"The bar to home ownership is higher than ever in Vancouver and Toronto, where a typical household would need to spend a record 88 per cent and 76 per cent of its income, respectively, to pay the mortgage, property taxes and utilities for a home purchased," the report said. 

'High hurdle' for first-time buyers

"The bar will get even higher in 2019, as the Bank of Canada continues to hike rates. Add in tougher mortgage stress-test rules and some first-time buyers will be looking at a very high hurdle."

Montreal, Edmonton, Calgary and Ottawa will also see affordability slip this year as the cost of housing will rise relative to household incomes. Overall, Canadians will spend 56 per cent of their median household income of $68,220 to own a home, up from almost 54 per cent last year, according to the report.

"Our view is that housing prices will be largely flat in the near term in part due to rising rates, and the ownership rate will decline in Canada, due to affordability issues," the bank said.

The Bank of Canada has raised interest rates five times since July 2015 and RBC expects two more hikes this year. But, expectations of rate hikes this year by traders in the stock markets has fallen dramatically this week.

Interest payments to rise

In 2019, 18 months into the central's bank's hiking cycle, the average household will pay about $1,000 more to service principal and interest obligations. Because household debt is high in Canada, people face higher costs for both mortgage and consumer debt.

"That would represent a 7.6 per cent jump from 2018 — a tough pill to swallow for many. Rising incomes, however, will provide a buffer," the report said.

RBC forecasts that the average disposable income per household before debt-service payments will grow by $2,300 this year. That means after Canadians service their debt, the average household will end up with $1,300 more in 2019.

"A nice cushion like this will keep a majority of households out of trouble. The question, though, is whether it will be enough to cover the rise in the cost of other goods and services," the bank said. 

"For many Canadians, it probably won't. Expect some belt-tightening in the year ahead."

Just last month, the Canada Mortgage and Housing Corporation (CMHC) warned that people living in Toronto and Vancouver may find themselves most "vulnerable" to interest rate increases as personal debt levels continued to hit record levels.

The debt-to-income ratio for Vancouver residents jumped to 242 per cent in the second quarter of last year, while it was 208 per cent for Toronto residents, according to the CMHC.

That means that for every $1 of disposable income, people owed $2.42 in Vancouver and $2.08 in Toronto.

The CMHC said that a major contributor to increasing levels of indebtedness was mortgage debt, which accounts for two-thirds of all outstanding household debt in Canada.