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Canada’s housing affordability continues to erode,
but next year should yield improvements, says RBC Economics
Climbing house prices continue to outpace income growth
TORONTO, December 20, 2006 — Stable borrowing
rates and a slight decline in utility costs provided little
relief to homeowners as Canada's housing affordability conditions
deteriorated for the fourth consecutive quarter, according
to the latest Housing Affordability Index released today by
RBC Economics.
"Across Canada, housing affordability further eroded
as rising house prices outpaced income growth in the third
quarter of 2006," said Derek Holt, assistant chief economist,
RBC. "However, affordability is likely to improve slightly
next year as the lagged effects of fourth quarter mortgage
rate declines, easing energy price pressures and a topping
out of home price appreciation will have a positive impact
for home buyers.
"In fact, after three consecutive quarters of sharp
deteriorations in affordability, the pace slowed for all home
classes in almost every region of the country. Alberta's housing
affordability was the lone exception, but it will probably
join the rest of the country next year," said Holt.
The RBC Affordability Index measures the proportion of pre-tax
household income needed to service the costs of owning a home.
The most affordable housing class remains the standard condo,
with an index of 28 per cent. A standard townhouse is next
at 32 per cent followed by a detached bungalow at 40.2 per
cent. A standard two-storey home is still the least affordable
housing type with an index reading of 45.8 per cent.
According to the RBC report, new home construction and house
resales are expected to soften nationwide in 2007, alongside
more reined-in expectations for house price gains. The overall
volume of home sales activity should remain high while the
majority of home equity gains enjoyed in recent years should
also be retained.
In central Canada, affordability is already improving across
some housing types despite softening incomes. For example,
Toronto prices for two-storey homes and townhomes are flat
compared to a year ago while bungalows are up mildly, and
condo gains are weakening. However, British Columbia, Alberta,
Saskatchewan, and most types of housing in Atlantic Canada,
continue to witness deteriorating affordability conditions.
RBC's Affordability Index for a detached bungalow in Canada's
other largest cities is as follows: Vancouver 70.1 per cent,
Toronto 43.8 per cent, Calgary 40.9 per cent, Edmonton 33.4
per cent, Montreal 36 per cent and Ottawa 30.8 per cent.
Also included in the report are housing affordability conditions
for a broader sampling of smaller cities across the country.
For these smaller cities, RBC has used a narrower measure
of housing affordability that only takes mortgage payments
relative to incomes into account.
The Housing Affordability Index, which RBC has compiled since
1985, is based on the costs of owning a detached bungalow,
a reasonable property benchmark for the housing market. Alternative
housing types are also presented including a standard two-storey
home, a standard townhouse and a standard condo. The higher
the index, the more costly it is to afford a home. For example,
an Affordability Index of 50 per cent means that homeownership
costs, including mortgage payments, utilities and property
taxes, take up 50 per cent of a typical household's monthly
pre-tax income.
Highlights from across Canada:
- British Columbia: Housing affordability deteriorated
for a fourth consecutive quarter across all four types of
homes driven by a small decline in average monthly incomes,
higher utility bills, and climbing house prices.
- Alberta: The third quarter marked the sharpest
broad-based quarterly deterioration in Alberta's affordability
since 1990 with erosion of 12 to 15 per cent for all home
segments. Commodity-related spin-off effects have created
ample job opportunities, driven wages up and pushed unemployment
to record lows, helping to fuel the residential housing
market. However, the market is shifting away from excess
demand and towards cooling price pressures.
- Saskatchewan: An increase in house prices, combined
with a slight decline in household income this past quarter,
led to a marginal deterioration in affordability. However,
if rates continue to remain stable and price growth levels
off, affordability is expected to improve across all sectors
in 2007.
- Manitoba: For the third quarter of 2006, Manitoba
saw the strongest overall improvement in affordability for
three out of four housing classes. It remains the most affordable
province for townhouses and condos even though the townhouse
sector witnessed a marginal deterioration.
- Ontario: Dropping off from the growth peaks in
house prices and incomes seen several quarters ago, Ontario's
housing market has now cooled to more moderate levels. This
cooling has been slow and steady, and should allow for homeowners
to retain the bulk of their home equity gains going forward
into 2007 and 2008.
- Quebec: Housing affordability erosion was less
severe this quarter as income gains and utility relief managed
to outpace house price growth. The level of sales is expected
to continue to cool, while new home listings are expected
to increase and price growth to slow to a gradual pace across
the market.
- Atlantic region: Affordability remained relatively
unchanged thanks to house price growth leveling off and
cooling household income gains. Following the trend taking
place in other parts of the country, the pressures on Atlantic
Canada's housing market showed signs of balancing for the
second half of 2006.
The full RBC Housing Affordability Index report is available
online, as of
8 a.m. E S.T. today at www.rbc.com/economics/market/pdf/house.pdf.
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For more information, please contact:
Derek Holt, RBC Economics, 416-974-6192
Jackie Braden, RBC Media Relations, 416-974-2124
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