Housing affordability in Canada hit the worst level in 27 years in the second quarter of this year, according to a Royal Bank of Canada report.

RBC Economics said in a report Friday that its housing affordability measure for Canada deteriorated for the eighth straight quarter. The Toronto area was the hardest hit, where RBC says affordability declined the most compared to the previous year and hit the worst level ever measured in the city.

The Ontario government’s actions in April to cool down the housing market, including a foreign buyer’s tax, did not have an immediate impact on provincial housing prices in the second quarter, RBC said.

“Clearly, home ownership remains out of reach for many would-be buyers in the area,” RBC Economics said in the report. “The good news is that some relief is on the way. Recent downward pressure on prices is poised to lower ownership costs in the period ahead. The bad news, unfortunately, is that rising interest rates will take some of that relief away.”

Still, the least-affordable place to purchase a home remains the Vancouver area, where affordability worsened after two straight quarters of improvement but remains better than a year ago. Outside of British Columbia and Ontario, affordability remains mostly stable, RBC said.

RBC’s housing affordability measure shows the proportion of median pre-tax household income required to service the costs of owning the average home – factoring in both condos and single-family detached homes -including mortgage payments, property taxes and utilities.

The Vancouver area was the least affordable in the latest quarter ended June 30, 2017 at 80.7%, down 2.4% year-on-year. The Toronto area was second-highest at 75.%, marking an increase of 12.7%. Victoria came in third at 58.6%, with a year-on-year increase of 7.3%. Across Canada, RBC’s housing affordability measure hit 46.7% in the latest quarter, a level not seen since the end of 1990 and an increase of 3.7% from a year earlier.

Many Prairie markets got some relief, with year-on-year decreases in Regina and Saskatoon to 28.7% and 32.1%, respectively, RBC said. Affordability deteriorated marginally in most of Quebec and the Atlantic region. In Quebec City, RBC’s metric improved slightly to 34%. In the Montreal area, it worsened by 0.8 points to 41.5%. In Saint John and Halifax, RBC’s affordability measure worsened to 24.5% and 32.1%, respectively, while it improved slightly to 27.7% in St. John’s.

Affordability in Edmonton worsened slightly year-on-year to hit 30.3%. In Calgary, however, affordability deteriorated by 1.5% year-on-year to 39.2%.

Rising interest rates will further weigh on Canadians’ ability to afford a home, RBC said. After rate hikes in June and September, RBC’s economists expect the Bank of Canada to raise its overnight rate one more time before year-end and three times in 2018 for a total increase of 100 basis points.

RBC Economics estimates that, everything else remaining constant, a 100 basis point increase in mortgage rates would worsen RBC’s national housing affordability measure by roughly 3.5 percentage points. Canada’s most expensive housing markets would be hit harder, RBC adds, noting Vancouver would see an almost 7% increase.

“This would occur at a time when housing affordability is already stretched in some of Canada’s largest markets,” RBC Economics said in the report. “While high sensitivity to a rise in interest rates highlights material vulnerability, the reality is bound to be less threatening as other factors such as income gains will mitigate at least of part of the impact.”

Canadian Press

The national housing agency is exploring ways to make it easier for entrepreneurs and new immigrants to buy a home by cutting some of the red tape required to prove they can afford to pay the mortgage.

“Right now, under our mortgage insurance policies, you have to be able to document income to get mortgage insurance, to a level of specificity that discriminates against new Canadians, because they can’t do that,” Evan Siddall, the CEO of the Canada Mortgage and Housing Corp., said in a wide-ranging interview with The Canadian Press.

“It discriminates against entrepreneurs, as well, because they can’t prove their income as well, so we’re looking at our own policies to try and make sure that there is more equity in our mortgage insurance programs,” he said.

Anyone who wants to buy a home in Canada without a down payment of at least 20 per cent of the purchase price is usually required to get mortgage loan insurance from the CMHC, which requires a smaller down payment of five per cent on a home worth up to $500,000.

A 10-per-cent down payment is required for the portion of the price over $500,000, with $1 million being the maximum property value allowed.

The mortgage insurance comes with a premium, which the lender will then pass on to the person buying the home.

Borrowers need to satisfy lenders they will be able to make their mortgage payments, which usually means providing proof of employment and a few pay stubs. But that can be tricky for people who just started their own business.

It can also be a barrier to those whose employment history has gaps for other reasons, such as having recently immigrated to Canada.

People who are self-employed, for example, usually need to provide notices of assessment for the previous two years. Their income is determined by averaging those two years, although the most recent year can be used if it has increased annually for at least four years.

They also need to have been doing the same type of work for at least two years.

Dan Kelly, president of the Canadian Federation of Independent Business, said more flexibility would be welcome, especially for startups.

“If one starts a business or is self-employed, the lines between their personal and business finances are often quite blurry,” said Kelly.

“Often, their personal assets are required to get financing for the business. But then they also have a challenge getting financing on the personal side, because they don’t have the nice, clean letter of offer from an employer that is often quite convincing in these situations,” he said.

Any relaxation of the rules would naturally increase the risk. So Siddall said the agency is looking at how to manage that, including different ways to document income, and higher premiums.

“Can we charge for that risk? Better to charge that risk than not to make it available,” he said.

Jack Fiorillo, a broker with TMG The Mortgage Group in Woodbridge, Ont., said he expects the CMHC to be fairly conservative on this front.

“It will be a very small sandbox that CMHC will play in, probably at the beginning, and then maybe if once their risk appetite increases, maybe they can expand that box,” said Fiorillo.

He said he expects the potential change to make it easier for a relatively small number of self-employed people to get a mortgage, and they will likely have to pay higher interest rates.

The CMHC said it has been compiling data on how many would-be homeowners have their mortgage applications rejected for these reasons, but cannot disclose those numbers right now because it is based on conversations with commercial lenders.

“We are still doing research and development to move this forward,” CMHC spokesman Jonathan Rotondo said in an email.

Siddall said the Crown corporation has raised the idea with its board and expects to announce something within the next six months.