The last three months of 2018 finally brought some improvement to housing affordability across Canada.

After more than three years of declining affordability, RBC Economics says its measure shows widespread improvement; although first-time buyers in the hottest markets are still facing a significant struggle.

In its Housing Trends and Economic Report, RBC’s aggregate housing affordability measure reduced by 0.7 percentage points to 51.9% last quarter (measured as a share of household income).

But in the three most expensive markets there is still a crisis with Toronto, Vancouver, and Victoria showing little improvement in affordability for most buyers.

Vancouver’s affordability crisis endures despite being in “full-blown correction mode. RBC says that even with the slump in sales, high prices means homeownership still requires an eyewatering 84.7% of household income.

Cooling market conditions in Toronto has taken a bite out of sales but RBC expects prices to be flat over the next two years; that won’t help the well-above-average affordability measure of 66.1%.

Montreal’s housing market is heating up but prices are rising at a steady pace.

The area’s affordability measure is some way below the two hottest markets and below the national average, but at 44.5% it is near a decade high.

Condos no longer the affordable alternative
The traditional option of a condo as a cheaper alternative to a single-family detached home is less attractive in the hottest cities.

RBC says that demand for condos has driven prices higher and their affordability measure has increased (become less affordable) by far more than single-family homes (2.9% vs. 0.9%) over the past year.

Buyers of an average condo in Vancouver, Toronto, Victoria, and Montreal pay a premium of more than $900 per month relative to renting a two-bedroom apartment, a figure that has ballooned in the past three years.

Buying a condo is a bigger step up from renting than it's ever been in these cities.

Interest rate outlook
RBC Economics is not expecting rates to rise anytime soon but does forecast a continuation of the strong labour market, helping boost household income.

"We have lowered our profile for future interest rates in light of disappointing economic developments since the late stages of 2018," said Craig Wright, Senior Vice-President and Chief Economist, RBC. "Furthermore, we also see very little scope for home prices to increase nationally this year."