Households could face even greater housing affordability challenges in the years to come, according to the September 2017 RBC Economics (RBC) Housing Trends and Affordability report. In noting that ” The days of ultra low interest rates in Canada are over,” RBC suggests that the two recent overnight interest rate increases by the Bank of Canada “are just the beginning of the hiking campaign.” RBC expects the Bank to increase rates another full one percentage point by the end of 2018. These higher interest rates would flow through to the housing finance market, with ominous implications for households seeking mortgages and those renewing existing mortgages.
RBC estimates that a one percentage point increase in interest rates could raise the costs of home ownership up by nearly seven percent relative to household incomes in the Vancouver metropolitan area (CMA). Ownership costs would rise more than six percent in the Toronto CMA. These would be substantial increases that many household would not be able to afford. To estimate that, we took the median household incomes from the 2016 Census and adjusted them upward to estimate their present level with weekly earnings data.
In both Vancouver and Toronto, households acquiring or renewing mortgages would need to find between $4,500 and $5,000 more by 2019 — and that’s assuming that house prices to not rise further (an optimistic assumption).
Of course, none of this is terribly surprising. Vancouver’s house prices have been well above levels justified by any rational set of economic fundamentals for decades. In Toronto, the problem goes back to about 2000. But the surprise is Victoria, which ranks third among housing markets threatened by the expected interest rate increases. A one-point increase in mortgage interest rates would set the median income household back about $3,400 in Victoria, more than the $2,900 in Calgary and well above the other major CMAs of Ottawa-Gatineau. Edmonton and Montréal, where increases would be around $2,000. In the next larger markets, Winnipeg and Québec, the increase would be between $1,400 and $1,500 (Figure). This is not to suggest that housing trends have been healthy in either Winnipeg or Quebec, where Frontier’s Canada’s Middle-Income Housing Affordability Crisis revealed house prices to have risen nearly four times as fast as incomes between 2000 and 2015.
Meanwhile, even before mortgage rates rise higher, the housing affordability crisis is severe. In Vancouver, where the 115 percent of the pre-tax median income household would be required to pay the mortgage on the average priced detached house. RBC assumes a down-payment of 25 percent, so for the many buyers with less than a 25 percent down payment, even more income would be required.
RBC noted some improvement in housing affordability in Vancouver following imposition of the foreign buyers tax in 2016. “RBC said that there improvements, made little difference for most buyers—owning a home at market price is still out of the reach of most Vancouver households.”
RBC also attributed much of the housing affordability deterioration in Victoria as a reaction to the foreign buyers tax in Vancouver. RBC estimates that the median household would require 63.2 percent of its income to purchase the average detached house. This is more than 10 percentage points more than in Calgary, which itself saw house prices rise more than twice as much as its rapidly increasing incomes between 2000 and 2015.
In Toronto, RBC estimates that the median income household would need 92.4 percent of its income to pay for the average priced detached house.
Meanwhile, the housing affordability crisis has drawn the attention of the Trudeau government. According to Bloomberg News, the Canada Mortgage and Housing Corporation (CMHC) prepared a for Families Minister Jean-Yves Duclos that attributed only 40 percent of the Toronto house price increases since 2010 on the economic fundamentals, such as including population, incomes and borrowing costs. The rest was attributed to supply constraints and speculation. That is hardly surprising, since in the urban containment policy environment of Toronto, the very purpose is to block the greenfield supply of new houses that is a prerequisite to keeping housing affordable. And, speculators are naturally drawn to markets where prices are increasing rapidly.
The federal government may have little, if any power to solve the problem, since the supply constraints are established at the provincial level. But, the Trudeau government’s concern is appropriate. Similar land use regulations have been shown to retard US economic growth in economic studies and much of the rising wealth inequality identified by French economist Thomas Piketty has been attributed to rising house prices in more highly regulated environments.
It is imperative for provincial authorities to begin implementing measures to liberalize the supply of land. Short of that, prices are likely to continue rising and fewer in the next generation will live as well as their parents did.