Posthaste: The worst of a historic home affordability crisis may be behind us

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Finally some good news on the home affordability front.

According to the Royal Bank of Canada‘s measure, it took 59.5 per cent of the median household income to own a home in this country in the second quarter. And while that might sound like a lot, it’s down from 63.7 per cent at the end of 2023.

The housing boom fuelled by the rock-bottom lending rates of the pandemic pushed home prices to dizzying heights in Canada, and then when mortgage rates shot up, RBC’s housing affordability measure deteriorated to the worst in history.

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The start of this year marked a turning point, when home prices stalled or fell in some markets, mortgage rates eased and wages grew, said Robert Hogue, RBC’s assistant chief economist.

“These developments finally halted the historic run-up in homeownership costs that took place during the pandemic,” he said.

Nationally, a household needed an income of $155,000 in the second quarter to afford a mortgage on a $810,200 home (the average benchmark price) — down from $161,000 at the end of 2023.

But that is still much higher than in 2019 before the pandemic, when the income needed was $96,000, or 38 per cent lower, said Hogue.

“Buyers continue to struggle to find a home they can afford in the aftermath of massive price escalation and spike in interest rates during the pandemic,” he said.

“Recent declines barely moved RBC’s affordability measures off worst-ever levels nationally and in many major markets.”

RBC estimates the median income in Canada at $87,000, about half of the paycheque needed to afford a home these days.

That may explain why even 75 basis points of interest rate cuts have failed to rouse home sales from their slumber.

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Royal LePage in its house price survey out today said listings on its websites hit a historical high in September, up 19 per cent from a year ago, but buyers continue to bide their time.

“Despite three cuts to the Bank of Canada’s overnight lending rate, buyer demand nationally remains weak, particularly among two key groups: first-time homebuyers and small investors,” said Royal LePage chief executive Phil Soper.

Royal LePage says the national home price fell 1.1 per cent to $815,500 in the third quarter from the quarter before, and it has revised down its forecast for the fourth quarter to 5.5 per cent growth, “to reflect current market conditions.”

The good news is that housing affordability should continue to improve.

RBC expects the Bank of Canada to cut its interest rate by another 125 bps to 3 per cent by spring. In its base-case scenario, home prices rise slightly, interest rates drop and household income grows.

“This will lead to the reversal of more than a third of the massive deterioration in RBC’s aggregate affordability measure that happened during the pandemic,” said Hogue.

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Inflation and higher interest rates have eaten into Canadians’ purchasing power since 2022, a Parliamentary Budget Officer report said this week, but there have been tougher times, said Priscilla Thiagamoorthy, senior economist at BMO Capital Markets.

Government aid, higher wages and investment income have helped buffer Canadians from the rising cost of living, and for the past year and a half, purchasing power growth has been steady and roughly in line with pre-pandemic trends, she said.

“The big picture is that although purchasing power growth is slower compared to the past 20 years, it’s better than the early 1990s,” she said.

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With interest rates dropping, a new or refinanced mortgage might make sense, but experts say borrowers need to watch out for what could be hefty fees. Find out more about the benefits and pitfalls here

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Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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