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Special Reports

 

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.

- 30 -

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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03/14/2008 10:41:37