Photo: James Bombales

Canadian home buyers should brace for an increasingly unaffordable housing market in the coming year, according to a new note from Scotiabank Economics.

In the note, the Scotiabank Senior Economist Adrienne Warren writes that the cost of homeownership now accounts for 37 per cent of the median Canadian income, the highest share in almost 30 years.

“We expect affordability to deteriorate further in 2018 and 2019 alongside rising borrowing costs and new mortgage rule changes,” reads the note.

Those mortgage rule changes will come into effect on January 1, when all uninsured borrowers will be required to qualify against the Bank of Canada’s five-year benchmark rate, or at their contract mortgage rate plus an additional 2 per cent.

The new rules are intended to ensure that uninsured borrowers can withstand higher interest rates. The overnight rate — which influences mortgage and was at a historically low 0.5 per cent earlier this year — has been raised 50 basis points since July, with some predicting a third hike next year.

“More stringent stress tests for uninsured mortgages… will exert a drag on affordability,” reads the note. “It is estimated that about 10 per cent of current loan applications would no longer qualify under the new rules.”

While affordability pressures could slow the market and cause prices to drop, Warren predicts that it is more likely prices will continue to rise in the new year.

“Coming into 2018 we’re looking at historically high immigration rates, which is going to put pressure on the market, particularly on single family dwellings which are sought after but really hard to add to the stock,” Warren tells BuzzBuzzNews.

She cites strong fundamentals such as low employment, a growing population, rising density and land costs as additional reasons for a price surge.

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According to the note, it would take at least 10 years of stagnant home prices and moderate income growth to make home ownership in Toronto and Vancouver affordable to the average Canadian.

“When you look at these numbers, it makes sense that in most parts of the country we’ve seen an increase in rental demand,” says Warren. “Though we’ve seen a fall off in homeownership rates most sharply in Toronto and Vancouver.”

Warren stresses that the current unaffordability of Canada’s housing market is here to stay.

“This is not a temporary deterioration we’re seeing,” says Warren. “This is going to be something that continues into the next two years.”

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