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Canadians are putting a larger portion of their earnings toward their homes, the Royal Bank of Canada said Friday, and interest rate increases are likely to put further pressure on homeowners in the coming months.
The problem is especially pronounced in Vancouver, where the bank estimated families must now dedicate 72 percent of their household income to pay the mortgage, property taxes and utilities on a bungalow. That's much higher than Toronto, where it would take 47.5 percent.
The bank's quarterly survey found affordability slipped in the first quarter of the year across the country, as higher prices in most markets meant buyers had to dedicate a larger share of their household budget to housing costs.
“We expect that the Bank of Canada will soon resume its campaign to normalize its interest rate policy, which will adversely impact housing affordability in Canada,” said Robert Hogue, senior economist at RBC. “Continued growth in household incomes, however, will likely soften the blow.”
The bank's Housing Affordability survey measures the amount of pre-tax household income needed to pay for a certain type of home. During the first quarter, all three housing types tracked became less affordable. The percentage for each category is how much of a family's income it takes to pay for housing costs, including mortgage payments, utilities and property taxes.
The detached bungalow benchmark rose by 0.7 percent of a percentage point to 40.5 percent of pre-tax income, while a two storey home increased by 0.2 to 46.2 percent and a condo gained 0.2 to 27.2 percent of pre-tax income.
“Interest rates will likely soon start to rise again, leading to a period of steady increases in homeownership costs. This, in turn, will contribute to a flattening in Canadian housing demand going forward,” said Hogue in a statement. “We could experience some turbulence this spring and summer, given that new tighter mortgage lending rules in March and April likely shifted home buying activity to earlier in the year.”
The report broke down affordability in major centres, saying that Vancouver's “significant gains in property values drove the already elevated cost of homeownership even higher.” Toronto, meanwhile, saw “somewhat tense market conditions” make homes less affordable.
“Despite the latest erosion in affordability, provincial levels generally continue to stand near their long-term averages, suggesting that owning a home remains affordable or, at worst, slightly unaffordable across Canada – with Vancouver being a notable exception,” said Hogue.
The affordability readings on a standard bungalow in Canada major cities were: Vancouver 72.1 percent (up 3.4 percentage points from the last quarter), Toronto 47.5 percent (up 0.8 of a percentage point), Montreal 43.1 percent (up 2.0 percentage points), Ottawa 39.0 percent (up 0.4 of a percentage point), Calgary 35.9 percent (up 0.9 of a percentage point) and Edmonton 31.5 percent (up 0.5 of a percentage point).