Homeownership costs in Canada retreated modestly in the first quarter of 2023, providing buyers with a small degree of relief amidst ongoing affordability challenges across the country, according to a new report from RBC Economics.

A moderation in housing prices in Q1 coincided with the Bank of Canada stepping back on successive rate hikes. This helped to bring the RBC’s aggregate affordability measure down for the first time in almost three years, dropping 1.6 percentage points to 59.5 percent.

The aggregate affordability measure looks at the proportion of median after-tax income it takes to cover housing costs (i.e., mortgage payment, property tax, utilities) against housing prices in a given market.

House hunters across the country saw a moderate drop in the affordability measure with the largest declines registered in Vancouver, Victoria and Toronto.

Affordability is a relative term in these metros, where housing prices still stretch far beyond average incomes, eroding affordability even more.

For example, the aggregate affordability measure in Victoria fell by 2.1 percent, but is at 73.5 percent which remains unaffordable by all traditional metrics. The same can be said in Vancouver, where the aggregate measure fell by 2.7 percentage points to 96.1 percent and in Toronto, where the measure fell by 2.0 to 79.0 percent.

Calgary and Edmonton continue to be outliers in the face of real estate trends, as local economic prospects and robust market activity have shielded property values to a greater degree and are far more affordable than some of Canada’s other big cites. Calgary’s affordability measure fell modestly in Q1 to 43.1 percent, while Edmonton fell to 34.2 percent.

Ottawa’s affordability measure continues to hover around all-time highs at 47.1 percent, despite a drop of 1.6 percent in the first quarter, challenging buyers in that market. Montreal is in a similar situation, with that market at 51.9 percent, after a modest first-quarter decline.

Maritime cities are more affordable relatively speaking, with affordability measures at 29.5 percent in Saint John and 42.1 in Halifax. Both markets are experiencing a historic lack of listings.

The consensus is that this downward trendline with the affordability measure is more of a pause in progress than a shift in the market, as additional interest rate hikes could be on the horizon, with inflation still well above the 2 percent target, despite a series of hikes over the last 15 months.

How far might the Bank of Canada go? RBC forecasts a terminal policy rate of 5.0 percent, which would be managed by the market, but any higher and affordability would be diminished, according to the report.

Meanwhile, the housing market has rebounded stronger than anticipated, as lower housing prices and a growing comfort level with higher borrowing cost is drawing buyers back to the market, with sellers still reluctant to list. The mismatch between supply and demand is continuing to place upward pressure on housing prices.

RBC had anticipated that it would take until the fall for the market to absorb the higher costs of borrowing, but low inventory is pushing the market up ahead of forecast, which could hamper or even reverse efforts to widen affordability for house hunters.

RBC Economics : Buyers Saw Some Relief in The First Quarter of 2023 by Heather Wright | Livabl