Restoring housing affordability will take 'years and concerted efforts' short of a housing crash: RBC report

Home ownership became slightly more affordable in the second quarter of the year in Canada but it remains "impossibly high for many," a new RBC report says.

RBC assistant chief economist Robert Hogue wrote in a note to clients on Thursday that the costs of owning a home did rise higher in the second quarter due to a "surprisingly strong rebound in housing demand this spring."

However, a "solid gain" in incomes helped reduce the amount that a household would need to cover its home ownership costs, or what RBC refers to as its aggregate affordability measure.

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RBC says this measure fell 0.3 percentage points in the second quarter, with home ownership costs making up 59.5 per cent of median household income.

But Hogue writes that the "near term outlook is likely to disappoint," as incomes "take a back seat" to higher mortgage rates and increasing prices.

"Housing affordability looks set to erode in Canada in the third quarter, unfortunately," he adds.

"That said, we see a turning point taking shape once rates and prices stabilize. We think an improving trend will emerge in 2024, and more clearly so after the Bank of Canada starts cutting rates — around mid-year in our view."

The current state of housing affordability is behind what Hogue calls a "notable cooling" in home resales this summer in Ontario and British Columbia, which could affect demand for months as a lot of buyers are "entirely priced out in Vancouver and Toronto."

The Prairies could be an exception, Hogue says, given the strong buyer confidence there.

But, "it will take years and concerted efforts to restore affordability," he says.

"Short of a housing crash that would destroy property values or an unexpected about-face in monetary policy, any progress in restoring housing affordability is likely to be slow," Hogue writes.

"Supply must increase by giant leaps to make a material difference. But building new homes takes a long time — up to several years in the case of large condo apartment complexes. And it's increasingly hard to build units ordinary Canadians can afford to buy given soaring construction costs and finite construction capacity."

The report does call a recent decision by the federal government to remove GST on the construction of new rental apartment buildings a "step in the right direction."

"Material" interest rate cuts are needed, though, to make ownership more affordable, Hogue says.

The Bank of Canada held its key interest rate at five per cent this month but analysts say an increase may come in October due to the latest rise in the annual inflation rate.

"However, our view is the Bank of Canada isn't about to switch to cutting mode until mid-2024. We expect little relief in the interim."