Rising rates pose challenges for first-time home buyers

The recent interest rate increases by the Bank of Canada, aimed at cooling inflation, are likely to have a significant negative impact on home buying affordability in the coming months, a new report predicts.

RBC Economics released in April a study on the impact of rising interest rates on the real estate market, finding many immediate and potential future headwinds for first-time buyers.

Among measures posing trouble for buyers is ownership cost as a percentage of household income, already at about 49 per cent last fall, is expected to reach 58 per cent by summer. That is the highest figure in more than 30 years, surpassing the previous high of 57 per cent reached in 1990.

Among other indicators of the negative impact of rising rates is a reduction in average purchasing power. The maximum purchase budget based on median household income is forecast to fall to about $554,000 by the end of the year, down from about $629,200 in the first quarter of this year.

As well, RBC noted fixed mortgage rates have increased “materially” since fall when markets began pricing in the cost of the expected increases to the Bank of Canada's overnight rate.

Since March 2, Canada's central bank has increased its overnight rate twice, increasing it by 75 basis points to one per cent. In turn, the prime lending rate that determines variable rate mortgages increased to 3.2 per cent.

The study, however, notes that variable rates are still historically low, though rates are likely to increase even more this year with the Bank of Canada forecast to increase its overnight rate by another 100 basis points to two per cent.

While affordability is likely to fall across the country, some markets will be less affected than others, including Calgary and Edmonton. The report noted that a percentage point increase by the Bank of Canada to the overnight rate increases the average monthly payment by $173 in Edmonton.