A recent RBC report measuring housing trends in Canada has found erosion in affordability for eight consecutive quarters. While the decline can be mostly attributed to the Toronto and Vancouver area, the affordability measure is at its worst level since 1990. The Bank of Canada has hiked rates twice this year, with another imminent hike a possibility. The affordability in these high-priced markets such as Toronto and Vancouver will be most sensitive to higher rates.

Get The REITs eBook in PDF

Get our PDF study on REITs and our other investor studies! Save it to your desktop, read it on your tablet, or email to your colleagues.

A Tale Of Two Cities

The continuing rise in home prices in Toronto were the main contributor to Canada's latest uptick in aggregate home affordability measure. Provincial regulation established in April intended to curb buyers and encourage sellers did just that, as home resales fell 44% between April and July. However, minimal effects on prices had been seen as prices continued to rise in the second quarter. Recent downward pressure on prices have finally emerged but may be offset by rising interest rates.

After targeted policies had cooled Vancouver's market in late 2016 and early 2017, affordability measure has again begun to deteriorate. While Toronto's housing market has more steam, Vancouver remains the "least affordable". Aggregate home ownership costs sits at 80.7% of median household income in Vancouver. Toronto is not too far behind with its record high of 75.4%. Both measures are substantially higher than the national measure of 46.7%.  RBC noted that "extremely poor affordability in parts of Ontario and British Columbia skew Canada’s overall picture. Outside of these two provinces, housing affordability trends generally have been more stable."

affordability measure

Joining the party recently, is Victoria, British Columbia. Their near record-high affordability measure of 58.6% is the third highest in Canada. Next to Toronto, Victoria has had the largest decline in affordability since the second quarter of 2016. RBC reasoned that Vancouver's easing policies, such as their foreign-buyers tax has significantly boosted property values in the island city.

Rising Interest Rates

One more rate hike from the Bank of Canada is anticipated this year, with another three expected in 2018. As mortgage rates are already on the rise, the upward trend in rates coukld cripple the already expensive markets.