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Home prices have 'never been so unaffordable' in Canada, says RBC

TORONTO, ON - APRIL 14:  A house is seen for sale on River street near Queen Street. As other investments tank, one of Canada's biggest real estate companies is predicting a .5 per cent contraction in Toronto home prices even if the COVID restrictions don't lift until late summer. If the world opens up sooner, house prices coud still rise 1.5 per cent year over year in 2020 in the region.        (Richard Lautens/Toronto Star via Getty Images)
Housing affordability deteriorated to its worst-ever level in the second quarter in Canada, a new report from RBC showed, as rising borrowing rates and elevated home prices took a toll on buyers' purchasing power. (Richard Lautens/Toronto Star via Getty Images) (Richard Lautens via Getty Images)

Canada's housing market marked a milestone in the second quarter — but not the good kind. RBC's latest Housing Affordability Measure showed it's the most difficult it's ever been to buy a home in Canada in the second quarter as borrowing costs jumped and home prices remained relatively elevated despite their recent declines.

"The frenzy that drove resale activity and prices to incredible heights at the start of this year is gone. Many buyers have been forced to the sidelines either because they no longer qualify for a mortgage or have seen their purchasing budget drastically reduced," Robert Hogue, the assistant chief economist at Royal Bank of Canada, wrote in a note to clients on Thursday.

Home ownership costs would eat up 60 per cent of the average household income in Canada, according to the report.

But when it's broken down regionally, the data shows just how unaffordable the country's biggest housing markets are.

It would take 90 per cent of the average household income to cover home ownership costs in Vancouver and 83 per cent in Toronto in the second quarter. Meanwhile, home ownership costs would require only 38.8 per cent and 29.3 per cent of average household income in Calgary and Edmonton, respectively.

"While the situation isn't as dire in other regions of the country—in fact, many markets in Alberta and Saskatchewan, and some in Atlantic Canada still look reasonably affordable—the rapidly deteriorating trend is universal," Hogue said.

The Bank of Canada has hiked its benchmark interest rate by three percentage points to 3.25 per cent since the start of the year, lifting mortgage rates and taking a toll on home sales activity.

The impact of higher mortgage rates has yet to fully run its courseRobert Hogue, assistant chief economist at RBC

August marked the sixth straight month of home sales declines, according to the Canadian Real Estate Association.

Central bank officials have warned they're not done raising rates as they seek to bring inflation back down to the two per cent target. RBC is expecting the central bank to further increase its overnight rate by three-quarters of a percentage point by the end of the year.

It costs an additional $380 per month to buy a typical home in Canada in the second quarter, mostly because of higher borrowing rates, the report said.

"The impact of higher mortgage rates has yet to fully run its course," Hogue said.

However, he predicts unaffordability will peak by the end of this year and homebuyers will begin to see some improvements in due time.

"We expect the softening in prices will continue and spread until a bottom is reached around spring time next year. We think this will lower ownership costs once interest rates stabilize," he said.

"Growing household income will partly drive the improvement that will follow. It will likely take years to fully reverse the tremendous deterioration that took place since 2021."

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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