The affordability of homes in Canada is caught in a tug of war between rising prices and lower mortgage rates. But the Royal Bank of Canada predicts that that’s all about to change.

RBC released its latest affordability study, and it shows that higher prices won the latest round, with Canadian home prices rising at their fastest pace in almost two years. Calgary, Vancouver and Toronto led the charge, causing houses to become less affordable despite a reduction in mortgage rates.

But RBC chief economist Craig Wright says he thinks the dynamics will shift. He expects that, industry-wide, five-year fixed mortgage rates will likely rise by about 0.75 percentage points this year, followed by further increases next year. The growth in prices, meanwhile, is expected to simmer down.

While the tug of war will change, the end result is still likely to be further erosion of affordability.

“With prices levelling off, that will be neutral to maybe slightly negative for affordability, but as rates go higher, that will make affordability a bit more of a challenge,” Wright says.

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