Modest decrease in homeownership costs takes place, but challenges remain
Canadian homeownership has become slightly more affordable in the first quarter of 2024, according to a report by RBC.
The costs for an average home across all housing types fell to 60.9% of median household income, down from 63.8% in Q4 2023. Despite this improvement, affordability remains near its worst levels nationwide due to soaring prices and interest rates during the pandemic.
“Becoming a homeowner has gotten much more difficult since the pandemic,” RBC assistant chief economist Robert Hogue wrote in the report. “Not only has the crushing weight of mortgage payments been a major hurdle, but the price of admission into the housing market—the downpayment—has shot up significantly.
The minimum downpayment for a starter home in Canada, such as a condo apartment, has increased by 40% since the end of 2019.
In Q1, the smallest downpayment for an average condo valued at $574,500 was $32,500 (5% on the first $500,000 and 10% on the value between $500,000 and $999,000). This amount represents 38% of the annual pre-tax income for a typical household, which is six percentage points more than before the pandemic and 12 percentage points more than a decade ago.
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The situation is even more challenging in Canada's most expensive markets. Rents in Vancouver and Toronto remain the highest in the country, and lower interest rates alone will not significantly alleviate this issue.
In Vancouver, the minimum down payment reached 61% of the median household income, while in Victoria and Toronto, it was 47% and 44%, respectively.
Hogue explained that it would take time and several interest rate cuts to lighten the weight of ownership costs enough to spur many potential buyers into action.
“A high cost of living makes it even more challenging for first-time homebuyers to save for a downpayment in these markets,” he said, adding that there’s a long way to go, but affordability is heading in the right direction. “We think ownership costs have room to fall further in the period ahead.”
RBC anticipates further improvements in affordability, albeit gradual. The Bank of Canada's recent rate cut is expected to be part of a larger trend, with RBC forecasting a full two-percentage-point cut in the policy rate to 3% by the end of 2025.
However, Hogue cautioned that this improvement will be limited: "In our base case scenario, home prices will see small increases, longer-term interest rates will moderately drop, and household income will grow steadily but see diminishing gains until the end of 2025. This will lead to the reversal of about a third of the massive deterioration in RBC's aggregate affordability measure during the pandemic."
The report concluded that while the situation is improving, it would only bring affordability back to early 2022 levels, which were already considered deeply unaffordable.
Hogue stressed that a broad suite of active policy measures will be needed to more fully restore housing affordability, acknowledging that the causes of Canada's housing crisis are complex and multifaceted.
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