Canada's Homeownership Affordability improves for the First
Time in over a year: RBC Economics
TORONTO, November 29, 2010 — After four consecutive
quarters of rising homeownership costs, housing affordability
improved in the third quarter of 2010 thanks primarily to
a drop in mortgage rates and some softening in home prices,
according to the latest Housing Trends and Affordability report
released today by RBC Economics Research.
"The improvement in affordability during the third quarter
has relieved some of the stress that had been mounting in
Canada's housing market over the past year," said Robert
Hogue, senior economist, RBC. "After appreciating rapidly
during the strong rebound in resale activity last year and
early this year, national home prices recently came off the
burner and retreated modestly as market conditions cooled
considerably through the spring and summer."
The RBC Housing Trends and Affordability report notes that,
at the national level, the third quarter improvement in affordability
reversed almost two-thirds of the cumulative deterioration
that took place over the previous four quarters. For the most
part, the RBC Housing Affordability Measures returned to their
levels at the end of 2009.
The RBC Housing Affordability Measure captures the proportion
of pre-tax household income needed to service the costs of
owning a specified category of home. During the third quarter
of 2010, measures at the national level fell between 1.4 and
2.5 percentage points across the housing types tracked by
RBC (a decrease represents an improvement in affordability).
The detached bungalow benchmark measure eased by 2.4 of a
percentage point to 40.4 per cent, the standard condominium
measure declined by 1.4 of a percentage point to 27.8 per
cent and the standard two-storey home experienced the largest
decrease, falling 2.5 percentage points to 46.3 per cent.
Despite some decline in home prices over last quarter, prices
were still 5.8 to 6.8 per cent higher year-over-year at the
national level. Conventional fixed mortgage rates came down
in the third quarter, with the five-year posted rate (the
basis on which the RBC Measures are calculated) falling more
than 0.5 percentage points to an average of 5.52 per cent,
entirely reversing the rise in the second quarter.
RBC notes that affordability could well improve further in
the near term, with additional cuts in the posted five-year
fixed rate already in place in the early part of the fourth
quarter and previous home price increases still being rolled
back in certain markets. However, RBC expects the Bank of
Canada will resume its rate hiking campaign by the second
quarter of next year, which will eventually have a more sustained
upward effect on mortgage rates.
"Higher mortgage rates will be the dominant factor raising
homeownership costs beyond the short term, although increasing
household income - as the job situation continues to strengthen
in Canada - will provide some positive offset," added
Hogue. "We expect housing demand and supply to remain
mostly in balance overall, setting the course for very modest
home price increases."
All provinces saw improvements in affordability in the third
quarter, particularly in British Columbia where elevated property
values amplified the effect of the decline in mortgage rates
on monthly mortgage charges. Ontario also experienced some
notable drops in homeownership costs, pushing down the RBC
Measures below their long-term average in the province for
bungalows and condominiums. Alberta and Manitoba are the only
two provinces where the RBC Measures stand below their long-term
average in all housing categories, indicating little stress
in these markets.
RBC's Housing Affordability Measure for a detached bungalow
in Canada's largest cities is as follows: Vancouver 68.8 per
cent (down 5.4 percentage points from the last quarter), Toronto
47.2 per cent (down 3.0 percentage points), Montreal 41.7
per cent (down 1.3 percentage points), Ottawa 38.2 per cent
(down 2.9 percentage points), Calgary 37.1 per cent (down
2.0 percentage points) and Edmonton 32.7 per cent (down 2.0
The RBC Housing Affordability Measure, which has been compiled
since 1985, is based on the costs of owning a detached bungalow,
a reasonable property benchmark for the housing market in
Canada. Alternative housing types are also presented including
a standard two-storey home and a standard condominium. 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: Lower
home prices and declining mortgage rates brought the B.C.
housing market some welcomed reprieve in the third quarter
from the significant deterioration in affordability recorded
since the middle of 2009. Amid much cooler resale activity
through the spring and summer and greater availability of
properties for sale, home prices either fell, particularly
for bungalows, or remained stable in the case of condominium
apartments. The RBC Housing Affordability Measures for B.C.
dropped between 1.8 and 5.0 percentage points, representing
the largest declines since the first quarter of 2009; however,
all remained significantly above long-term averages. Poor
affordability is likely to continue to weigh on housing
demand in the province in the period ahead.
Despite recording substantial affordability improvements
since early 2008, housing demand in Alberta is still a shadow
of its former self from just a few years ago and there are
few signs that it is picking up meaningfully. The RBC Measures
eased between 0.8 and 1.8 percentage points, more than reversing
modest rises in the second quarter. Homeownership is among
the most affordable in Canada both in absolute terms and
relative to historical averages. RBC notes such a high degree
of affordability bodes well for a strengthening housing
demand once the provincial job market sustains more substantial
Saskatchewan home resales rebounded since August and reversed
most of their slide in the first half of this year; however,
the earlier softening of activity had a lingering effect
on home prices which fell across all housing types relative
to the second quarter. RBC's Affordability Measures dropped
1.8 and 2.2 percentage points, the most since early 2009
but still modestly above their long-term average, suggesting
that current market conditions might be stretching Saskatchewan
homebuyers' budgets to a degree.
Manitoba's housing resales picked up smartly in September
and October, swiftly turning the page on a particularly
weak summer period, with provincial homebuyers taking advantage
of improving affordability. RBC's Measures fell between
0.9 and 2.3 percentage points, reversing one-half to three-quarters
of the increase that occurred since the spring of 2009.
Manitoba is one of only two provinces, with Alberta, where
the measures for all housing types are currently below their
long-term averages, which will be a supportive factor for
demand going forward.
After four consecutive quarterly increases, the cost of
homeownership declined in Ontario in the third quarter thanks
to lower mortgage rates and some softening in property values.
RBC's Measures fell between 1.3 and 2.4 percentage points,
fully reversing the increase in the second quarter. Existing
home sales ended their precipitous slide confirming RBC's
earlier expectation that the slowdown in activity through
the spring and summer largely reflected various transitory
factors - including the HST and changes in mortgage lending
rules - that spurred demand at the start of this year. With
the market now back in balance, the recent softness in home
prices will likely prove to be a healthy recalibrating following
a strong rally.
The Quebec housing market is making its way towards more
stable activity levels after plummeting to six-year lows
at the end of 2008 and then surging to all-time highs
at the start of 2010. Supporting this trend in the near
term is an improvement in affordability in the third quarter.
Following four consecutive increases, the RBC Measures
for the province fell 1.4 to 1.8 percentage points depending
on the housing type, but still remain close to the pre-downturn
peaks and above their long-term average, which will likely
restrain growth in demand in the period ahead.
The East Coast housing market picked up some steam early
this fall following a marked cooling in activity in the
spring when resales fell back to the lows reached at the
end of 2008. Modest price declines and a drop in mortgage
rates contributed to lower third quarter homeownership
costs with RBC's Measures moving down between 1.0 and
1.5 percentage points in the third quarter and returning
roughly to the levels experienced in mid- to late-2009.
Overall, housing affordability remains attractive in Atlantic
The full RBC Housing Trends and Affordability report
is available online, as of 8 a.m. ET today at www.rbc.com/economics/market/pdf/house.pdf.
- 30 -
For more information, please contact:
Robert Hogue, RBC Economics Research, 416-974-6192
Elyse Lalonde, Media Relations, RBC, 416-974-8810