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March 2008
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Housing affordabiity at its worst at end-2007; but relief is ahead
- Nationawide housing affordability deteriorated in every quarter throughout 2007 to end up at the worst level since the housing bubble peaked in 1990. Back then, soaring interest rates and a recession sparked much of the trouble. Today, however, a long upward trend in house prices, driven by sounder macroeconomic fundamentals such as job growth, is primarily responsible. Adding more fuel to this housing cycle is mortgage product innovation that has opened the market to more potential buyers since mortgage insurance liberalization began two years ago.
- During the fourth quarter, affordability for all four housing classes eroded across the country, with the exception of the cooling Alberta market where all housing segments experienced a drop in average price that resulted in improved affordability. Across the country, the standard condo remained the most affordable housing type, requiring about 30% of pre-tax household income. A standard townhouse was next at 34.5%, followed by a detached bungalow at 42.5%, while a standard two-storey home remained the least affordable housing type at 48%.
- The lagged effects of higher fixed mortgage rates continue to be a significant part of deteriorating affordability, but our forecast calls for the popular five-year mortgage rate to drop drop by a further 75 basis points by year-end. Going forward, falling mortgage rates, cooler house price gains and decent income growth should all lead to improved affordability across most markets.
- Alberta’s housing market is on watch for possible further negative developments. The average price of a standard two-storey home fell by 4.3% last quarter compared to the previous quarter. Bungalow prices fell by 7.3%, townhomes were off by 4% and condo prices fell by 5.3%, their second consecutive quarterly dip.
- The price of the benchmark two-storey home in Alberta is still 63% higher than two years ago. However, the year-over-year pace of price gains has gone from about 50% a year ago to only 11% today. Furthermore, the sales-to-listing ratios in Calgary and Edmonton remain at about 0.4, or about one-half the peak recorded during the past two years, which would point to the risk of further price cooling in a market with more slack.
- The onset of slipping house prices in Alberta and elsewhere in the country may well enhance a growing tendency to make comparisons between Canadian and U.S. household finances. Americans are still modestly richer, but much more heavily leveraged and further indebted with less liquidity. That, in turn, makes them more vulnerable than Canadians to ongoing credit market turmoil and risks associated with changes house price trends. In fact, the sharp depreciation in the U.S. dollar during the past six years has made Canadians relatively richer over time by raising the value of what their wealth will buy in world markets compared to that of their U.S. counterparts.
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