Rapidly escalating homeownership costs in Vancouver and Toronto caused the highest quarterly jump in the national affordability index in six years, says RBC in its second quarter Housing Trends and Affordability Report. Even though affordability was close to historical norms in most of the country, even improving in a couple of cities, those two hotspots pushed the affordability measure up by 1.2% to 42.8%. This is the percentage of pre-tax household income that would be required to own a home, including mortgage payments, taxes, utilities. Vancouver’s, and “to a lesser extent” Toronto’s soaring prices fuel “genuine concerns” about overheating in these markets, says RBC.

Vancouver stands out, as it has for the past several years, as the country’s least affordable city for homeowners. The “seemingly unstoppable” home prices are moving Vancouver’s affordability measures deeper into “uncharted territory” according to RBC. The aggregate measure rose 6.1% in the second quarter to an “astounding” 90.3. The measure for single-detached homes has “skyrocketed” by 28.9% over the past year, reaching 126.8%. Owning such a home is a luxury that very few “locals” can afford, says RBC. As for foreign nationals, thought to be largely responsible for the surging prices in Vancouver’s housing market, their activities in the market will almost certainly be reduced now that a 15% tax applies to foreign purchasers. The move by the BC government “may be a signal” that it is intent on engineering a cooldown in the market.

Next to Vancouver, Toronto’s affordability measure, now at 60.2%, looks almost reasonable, until one remembers that that is the percentage of income a household has to pay out just to cover ownership costs. This is the highest it has been in Toronto in more than twenty-five years. For comparison, the measure for Regina is 28.6, for St. John’s 26.2, and for Montreal 39.4. As the table below shows, affordability is normal in most cities.

The outlook for affordability across Canada calls for more of the same, says RBC: intense pressure in Toronto and Vancouver, very “relaxed” in Calgary, where there has been a net outflow of population and falling home prices in the last twelve months, and “normal” conditions in most other markets.

Signs of cooling resale activity have emerged in Vancouver and more tentatively in Toronto and we believe the blistering pace of property appreciation in both markets may slow by year end. This likely won’t help affordability in the near-term because of demand-supply tightness in the two markets at the present time, but some relief could arrive late this year or early in 2017.

Despite the “rapidly deteriorating” affordability in Toronto, RBC says that the housing boom was still in “full swing” in the spring. Rising prices failed to dampen the “supercharged” demand, especially in the single-detached segment, where supply remains very tight. In the condo market, affordability eroded more “modestly.” The affordability measure for condo ownership in Toronto edged up 0.4% in the second quarter, the average condo costing $371,100. Nationally, the affordability measure for condominium ownership was 34.4%, exactly the same as in Toronto.

There may be tentative signs, says RBC, that the market in Toronto has topped out. Resale numbers peaked in May and have since dropped a little, while new listings have begun to rise again. If these trends are sustained in coming months, “there may be some moderation” in pace of price increases.

Both the Toronto and Vancouver markets are as hot as they are because of favourable economic fundamentals, RBC says. Low interest rates, solid job growth, combined with the limited supply of single-detached homes, explain much of the rapid price escalation. These “robust” local fundamentals do not fully explain Vancouver’s record-high affordability measure, however, and RBC suggests that “over-exuberant price expectations” have also played a major part.

Chief Economist Craig Wright commented that the “blistering pace” of property appreciation in both markets may slow by year end, though this will not help affordability because of the tightness of supply. Look for “some relief” late this year or early next.

Except in Toronto & Vancouver, Home Affordability Near Normal in Canada by Josephine Nolan | Condo.ca