Rising Rates Pose Affordability Issues for Newbies

RBC Economics notes that the cost of ownership as a percentage of household income, from around 49% last fall, could rise to 58% by summer.

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According to a new report, recent interest rate hikes by the Bank of Canada, aimed at curbing inflation, are likely to have a significant negative impact on the affordability of buying a home in the coming months.

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RBC Economics released a study in April on the impact of rising interest rates on the housing market, revealing many immediate and potential headwinds for first-time buyers.

Among the measures that are problematic for buyers, the cost of ownership as a percentage of household income, already at around 49% last fall, is expected to reach 58% by the summer. This is the highest figure for more than 30 years, surpassing the previous record of 57% reached in 1990.

Other indicators of the negative impact of rising rates include a reduction in average purchasing power. The maximum purchase budget based on median household income is expected to drop to around $554,000 by the end of the year, from around $629,200 in the first quarter of this year.

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Additionally, RBC noted that fixed mortgage rates have risen “significantly” since the fall, when markets began pricing in the cost of the Bank of Canada’s planned overnight rate increases.

Since March 2, Canada’s central bank has raised its key rate twice, bringing it from 75 basis points to 1%. In turn, the prime rate that determines variable rate mortgages rose to 3.2%.

The study notes, however, that variable rates are still historically low, although they are expected to rise even further this year, with the Bank of Canada planning to raise its overnight rate by another 100 basis points to 2%.

While affordability is likely to fall across the country, some markets will be less affected than others, including Calgary and Edmonton. The report notes that a one percentage point increase by the Bank of Canada in the overnight rate raises the average monthly mortgage payment in Calgary by $215, based on average home value. In Edmonton, a 1% increase would increase the monthly payment by $173.

In contrast, Vancouver mortgage holders could see their monthly payments jump by $526, the biggest increase among any city in the report.