Leading economist weighs in on 2023 market – and the future of the stress test
It was a grim diagnosis that confirmed what many had already suspected: it has never been more difficult to purchase a home in Canada, according to a new report by RBC Economics assessing affordability in the country’s housing market.
Over the past year, the decline in affordability across Canada has been “off the charts” in most parts of the country, the banking giant’s Housing Trends and Affordability report revealed, with buyers in Ontario and British Columbia facing some of the starkest challenges (even though conditions remain “manageable” in the Prairies and most of Atlantic Canada and Quebec).
Surging home prices in 2021 collided with steep interest rate hikes this year, meaning RBC’s national aggregate affordability measure – a key barometer of Canadians’ ability to purchase homes – hit its worst-ever point in the second quarter of this year (60%, up from the previous high of 57% in 1990).
The report sounded a more positive note on ease of access to the housing market in the future, indicating that a pronounced slowdown in purchase activity and falling home prices are likely to offset the booming price growth of the first two years of the COVID-19 pandemic.
That said, such a scenario is unlikely to unfold any time soon – especially with the Bank of Canada expected to make further rate hikes in the coming months, according to the report’s author and assistant chief economist at RBC, Robert Hogue (pictured top).
He told Canadian Mortgage Professional that affordability would likely remain well out of reach for many Canadians throughout the remainder of the year.
“Our view is that eventually [falling prices] should improve affordability, but that’s probably not in the very near term, like over the coming months,” he said. “But once interest rates stabilize, eventually further down the road, there might be some scope for reversing to a certain extent.
“This is when we would expect affordability to improve. So it’s more of a 2023 story than a 2022 story.”
The aggregate affordability measure for two British Columbia locations – Victoria and Vancouver – spiked in Q2, to 67.6% and 90.2% respectively, while Toronto also saw unaffordability skyrocket in the opening months of the year.
Some markets look “reasonably affordable,” RBC said, including many in Alberta and Saskatchewan. Still, the trend of rapid deterioration, it added, is “universal.” Indeed, while there will be some improvements thanks to falling prices and growing household income, it will likely be years before the precipitous decline in affordability witnessed over the past two years is fully reversed.
All in all, price growth last year and rate hikes in 2022 mean that it cost an extra $380 per month to buy a typical home in Canada in the second quarter of the year, according to RBC, with $230 of that due to higher mortgage rates.
Recent weeks have seen calls intensify for the country’s banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), to revisit its criteria for borrowers to qualify for a mortgage.
Superintendent Peter Routledge appeared to dismiss that prospect in a September speech – and while Hogue said now would be an unwise time to make an adjustment, it could arrive at some point down the line.
“I think there’ll have to be some consideration to adjust the mortgage stress test, but… in the current environment of great uncertainty about when and how high interest rates will have to rise, it’s a little bit premature to make any changes right now,” he said.
“But certainly, months down the road, that would be totally appropriate to go through and rethink… probably make it a bit more flexible.”
There remains a lot of uncertainty about the Bank of Canada’s planned terminal point on its trendsetting interest rate, Hogue said, with inflation remaining persistent and the central bank having said in its latest statement that it expected rates would need to rise even further.
“If inflation is more stubborn than we think, and might stay up longer than we think, then they could go higher,” he said. “So given the uncertainty, it still makes sense to have a fairly stringent stress test – but over time, I think it will be appropriate to think of making it more flexible over the cycle.”