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Housing affordability to improve in 2008, says RBC Economics
Alberta on watch but Canadian household finances in better
shape than stateside
TORONTO, March 14, 2008 — Housing affordability
continued to deteriorate through 2007, but relief is on the
horizon for most markets in 2008, according to the latest
housing report released today by RBC Economics.
"Housing affordability deteriorated across the country
in every quarter in 2007, to end the year at its most unaffordable
level since 1990," said Derek Holt, assistant chief economist,
RBC. "Back then, soaring interest rates and a recession
sparked much of the trouble. Today, a long upward trend in
house prices driven by sounder macroeconomic fundamentals,
like job growth, is primarily responsible for the deterioration
in affordability."
The RBC Affordability measure captures the proportion of
pre-tax household income needed to service the costs of owning
a home. During the most recent 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 per cent of pre-tax household income. A standard
townhouse was next at 34.5 per cent, followed by a detached
bungalow at 42.5 per cent while a standard two-storey home
remained the least affordable housing type at 48 per cent.
According to the report, the delayed effects of higher fixed
mortgage rates continue to be a significant part of deteriorating
affordability, but it is expected that the popular five-year
mortgage rate will drop a further 75 basis points by year-end.
Going forward, falling mortgage rates, weakening house price
gains and decent income growth should all lead to improved
affordability across most markets.
The report also presents a comparison of Canadian and U.S.
household finances, and shows that Americans are still modestly
richer, but much more heavily leveraged and further in debt
with less liquidity than Canadians. That, in turn, makes them
more vulnerable to ongoing credit market turmoil and risks
towards house prices than Canadians. In fact, the sharp depreciation
in the U.S. dollar over 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 American counterparts.
In addition to major urban centres in Canada, the report
includes 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.
RBC's Affordability measure for a detached bungalow for Canada's
largest cities is as follows: Vancouver 74 per cent, Toronto
47 per cent, Calgary 42 per cent, Montreal 37 per cent and
Ottawa 32 per cent.
The Housing Affordability measure, 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 reading, the more costly it is to afford a home. For example,
an Affordability reading 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: Although affordability conditions
deteriorated to their worst level on record at the end of
2007, the province is poised for some affordability relief
in 2008 as a result of cooler price gains and lower interest
rates.
- Alberta: At the end of 2007, the province witnessed
broad-based affordability improvements across all housing
segments for the first time in over three years. Rapidly
cooling prices put the province on watch, but should result
in improved affordability for 2008.
- Saskatchewan: Saskatchewan has become the new Alberta.
Constraints in the existing home market have pushed into
overflowing demand in the new home market. As the national
leader for growth in housing starts, house prices, residential
building permits, and resale activity, the province saw
substantial erosion in affordability in 2007. In 2008, affordability
conditions should gradually stabilize.
- Manitoba: Housing markets across the province continue
to heat up. Resale markets continue to drive strong price
gains, but as household income continues to grow at the
third-fastest rate in the country, affordability conditions
remain steady.
- Ontario: Even though housing affordability deteriorated
across all housing segments, the pace has slowed. The province
should see improvements in 2008 from a cooling economy,
lower mortgage rates, and softer price gains.
- Quebec: A generally balanced market has helped
keep housing affordability in check. In 2008, a slower pace
of house price gains and softer income growth should contribute
to improved affordability conditions.
- Atlantic region: Affordability continued to erode
in the final quarter of 2007. A combination of income growth,
moderate house price gains and anticipated mortgage rate
relief across all home segments should improve affordability
in 2008.
The full RBC Housing Affordability report is available online,
as of 8 a.m. E.D.T. today at www.rbc.com/economics/market/pdf/house.pdf.
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For more information, please contact:
Derek Holt, Economics, RBC, 416-974-6192
Amy Goldbloom, Economics, RBC, 416-974-0579
Jackie Braden, Media Relations, RBC, 416-974-2124
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