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Soft housing market in Canada provides affordability relief: RBC Economics

  • A decline in property values helped improve RBC’s affordability measure for Canada for the first time in more than three years in Q4/2018
  • The improvement was widespread across the country
  • Owning a home in Vancouver, Toronto and Victoria is still way out of reach for many buyers

TORONTO, March 28, 2019 - After three years of deteriorating housing affordability in Canada, a measure of relief arrived for prospective home owners, according to the latest RBC Economics Housing Trends and Affordability Report.

The broad-based softening of housing market activity helped lower home ownership costs nearly everywhere in Canada, taking down RBC’s aggregate housing affordability measure by 0.7 percentage points to 51.9 per cent last quarter. This measure is calculated as a share of household income. A lower number means that buying a home is more affordable.

Still, the fourth-quarter relief barely made a dent in Vancouver and Toronto where affordability remains at crisis levels. Owning a home in both of these markets, as well as in Victoria and increasingly Montreal, is a huge stretch for ordinary buyers.

Across the rest of the country, however, housing affordability levels are generally within historical norms. The affordability strains present in Canada are still confined to a few—but large—markets.

The good news is that the dip in ownership costs in the fourth quarter is unlikely to be an aberration.

“We have lowered our profile for future interest rates in light of disappointing economic developments since the late stages of 2018,” said Craig Wright, Senior Vice-President and Chief Economist, RBC. “Furthermore, we also see very little scope for home prices to increase nationally this year.”

With tight labour markets poised to keep household income growing, the stars are aligning for more affordability relief in the period ahead.

Affordability crisis magnifies Vancouver market correction
Much of the improvement in RBC’s aggregate affordability measure came from a fall in prices in Vancouver, where the market is now in full-blown correction mode. Home resales have plummeted 58 per cent since early 2016 with no signs of a turnaround so far in 2019. But with Vancouver ownership costs still representing 84.7 per cent of household income, the market is still a long way from ending the affordability crisis.

Owning a home still a stretch for Toronto buyers, despite market cooling
In Toronto, owning a home remains a huge stretch for many buyers. Despite a significant cooling to the Toronto housing market, RBC’s aggregate measure (66.1 per cent) continues to be near historical highs. RBC Economics does not expect the market to reverse its two-year, 31 per cent sales decline any time soon. Furthermore, it is expected that prices will likely stay flat overall this year.

Decade-low affordability not an obstacle for Montreal buyers
With a vibrant economy and increasing international interest, homebuyer demand has been solid in Montreal. Property values are going up, but at a controlled pace. As a result, housing affordability is eroding gradually to levels that could potentially pinch buyers—though so far they haven’t shown any sign of balking. RBC’s aggregate measure of 44.5 per cent is near a decade high.

Buying a condo a bigger step up than ever from renting
Intense affordability pressures present in Canada’s largest markets over the past few years have boosted demand for lower-priced housing options—mainly condos. The catch has been, however, that condo prices have risen sharply, which eroded condo affordability. Over the past year, condos’ affordability advantage has narrowed: RBC’s affordability measure for condos in Canada increased by 2.8 percentage points compared to only 0.9 percentage points for single-detached homes. The appeal of condo ownership is also diminishing relative to renting an apartment in Canada’s priciest markets. Buyers of an average condo in Vancouver, Toronto, Victoria and Montreal pay a premium of more than $900 per month relative to renting a two-bedroom apartment. That premium has ballooned in the past three years. Buying a condo is a bigger step up from renting than it’s ever been in these cities.

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For more information, please contact:
Craig Wright, Senior Vice-President and Chief Economist, RBC, 416-974-7457
Robert Hogue, Senior Economist, RBC Economics Research, 416-974-6192
Joel Dembe, RBC Communications, 647-518-4981