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Housing affordability has reached a new low in Canada, hitting the worst level seen since 1990, thanks to elevated home prices in Ontario and BC.

Both Greater Vancouver and the Greater Toronto Area (GTA) had the poorest housing affordability in the country in the second quarter of 2017, according to RBC’s Housing Trends and Affordability report, published today.

“Affordability in Toronto continued to deteriorate quite substantially and had the biggest impact on Canada’s measure of affordability,” Robert Hogue, senior economist for RBC Bank, tells BuzzBuzzNews.

Every quarter, the bank assesses the state of housing affordability in major Canadian markets using its Housing Affordability Measure. The measure represents the percentage of median pre-tax household income that would be required to service the cost of house ownership expenses based on the average market price for single-family homes and condos. The higher the measure is for a market, the more difficult it is to afford a home.

In Q2 2017, the GTA saw the biggest drop in affordability among all markets observed.

RBC says this decline is due to the GTA’s surge in home prices over this time period.

In response to the GTA’s skyrocketing activity, the Ontario government introduced its Fair Housing Plan, which included a 15 per cent non-resident speculation tax for the Greater Golden Horseshoe region in April.

The plan caused sellers to retreat to the sidelines but the impact on prices wasn’t seen as quickly, says RBC. As a result, any signs of price moderation seen in Toronto emerged too late to be seen in the second quarter, says Hogue.

In Q2 2017, the GTA’s affordability measure soared to a record-high of 75.4 per cent (a rise in the measure represents a loss of affordability) — the poorest level ever measured in Toronto by RBC.

This gain was the main driver in Canada’s aggregate affordability measure rising for an eighth consecutive time by 1.4 percentage points to 46.7 per cent.

The GTA isn’t the only culprit when it comes to Canada’s deteriorating affordability measure — Greater Vancouver’s eroding affordability played a hand too.

Following the introduction of a foreign-buyer tax for Greater Vancouver in August 2016, affordability improved in the region in the second half of 2016. However, in Q2 2017 the city’s affordability measure climbed by 2.6 percentage points to 80.7 per cent, the highest in Canada by far.

“After having improved for two consecutive quarters previously, now higher prices in Vancouver meant affordability deteriorated again in the second quarter,” says Hogue.

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Victoria also saw a drop in housing affordability last quarter, claiming the third-highest measure among the markets tracked by RBC.

The aggregate affordability measure for Victoria jumped by 1.8 percentage points to 58.6 per cent, most likely impacted by activity in Greater Vancouver.

“Prices have been rising quite rapidly in Victoria in recent years and part of it is related to the heat in Vancouver. Because Vancouver heated very significantly and then that heat spread across BC including into Victoria,” says Hogue.

Although poor affordability in markets in Ontario and BC skewed Canada’s overall measure, affordability is generally more stable in other markets across the country.

According to Hogue, most markets are not far off their long-run average and remain fairly neutral with neither a positive or negative effect on the national market.

Looking ahead, however, affordability in all markets is at risk of eroding even further with possible interest rate hikes by the Bank of Canada.

The central bank raised the overnight rate, which influences the mortgage market, by 25 basis points twice this year in July and September, with the rate now sitting at 1 per cent.

RBC forecasts the Bank of Canada will raise its overnight rate one more time in 2017 and three times in 2018 for a total increase of 100 basis points.

Hogue says all markets would be affected by a rate hike but the impact to affordability would be most substantial in Toronto and Vancouver.

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