Although the BC government recently implemented a new housing plan to curb demand and slow skyrocketing prices, housing affordability is slated to deteriorate further this year and in 2019.
According to a new Scotiabank Economics report, the Bank of Canada is expected to increase interest rates over the next two years, and as a result, affordability will continue to worsen long-term.
“The Bank of Canada, after raising its policy rate 25 basis points in January, is expected to follow up with two more rate hikes this year and to continue on a gradual tightening path with three more hikes in 2019,” reads the report, published this week.
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Currently, to purchase an average priced home in Vancouver, mortgage carrying costs account for over 65 per cent of a median household income — a record high, says Scotiabank. Even condos, which are a more affordable homeownership option in the city, absorb more than 40 per cent of median income.
According to the report, average home prices in Vancouver would need to drop by roughly 25 per cent from current levels in order to bring mortgage carrying costs relative to household income back to the long-term average of around 50 per cent.
In an effort to address poor affordability across the province, the BC government unveiled its housing plan in February, as part of its 2018 budget. The comprehensive plan includes a new speculation tax, along with an increase to the existing foreign buyer tax to 20 per cent and extending its boundaries.
Scotiabank says these new property taxes combined with stricter mortgage regulations and rate hikes will likely lead to a small slowdown in home sales this year. Prices, on the other hand, are expected to continue rising.
“Average MLS home prices are forecast to post another year of relatively moderate low single-digit increase in 2018, though this in part reflects the continuing compositional shift in sales toward lower-priced dwellings,” reads the report.
In the near-term, the bank says higher interest rates and BC’s new housing policies could slow upward pressure on prices, but that cooling off period won’t last for long.
“Over the medium- and longer-term, there is a strong likelihood that average home prices in BC’s largest urban centres will continue to trend higher, supported by a growing population and rising land costs,” reads the report.
This year, benchmark home prices in BC’s Lower Mainland and South Vancouver Island are expected to increase by five to 10 per cent.