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Canadian homeownership costs ease for second
consecutive quarter: RBC Economics
TORONTO, February 24, 2011— Canada's housing
affordability continued to improve in the fourth quarter of
2010, thanks in part to slight decreases in five-year fixed
mortgage rates and minimal home price appreciation across
the country, according to the latest Housing Trends and Affordability
report released today by RBC Economics Research.
"Some of the stress that had been building in the housing
market between 2009 and the first half of 2010 has been relieved,
but tensions persist overall and the recent improvement in
affordability is likely to be short-lived," said Robert
Hogue, senior economist, RBC. "We expect that the Bank
of Canada will resume its rate hike campaign this spring and
with borrowing costs set to climb further in the next two
years, housing affordability will erode across the country.
That said, we don't expect this to derail the housing market
because of rising household income and job creation from the
sustained economic recovery."
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 fourth quarter
of 2010, measures at the national level fell between 0.4 and
0.8 percentage points across the housing types tracked by
RBC (a decrease represents an improvement in affordability).
The detached bungalow benchmark measure eased by 0.8 of a
percentage point to 39.9 per cent, the standard condominium
measure declined by 0.4 of a percentage point to 27.6 per
cent and the standard two-storey home decreased 0.4 percentage
points to 46.0 per cent.
"We expect affordability measures will rise gradually
in the next three years or so while monetary policy is readjusted,
but will land softly thereafter once interest rates stabilize
at higher levels," added Hogue. "This pattern would
be consistent with moderate yet sustained stress on Canada's
housing market. Overall, the era of rapid home price appreciation
of the past 10 years has likely run its course and we believe
that Canada has entered a period of very modest increases."
A majority of provinces saw improvements in affordability
in the fourth quarter, most notably in Alberta where falling
home prices once again contributed to lower the bar for affording
a home. Only the standard two-storey benchmark became less
affordable in Ontario and Quebec, as did the standard condominium
apartment in Quebec and the Atlantic region.
RBC's Housing Affordability Measure for a detached bungalow
in Canada's largest cities is as follows: Vancouver 68.7 per
cent (down 0.4 percentage points from the last quarter), Toronto
46.8 per cent (down 0.5 percentage points), Montreal 41.3
per cent (down 0.4 percentage points), Ottawa 38.7 per cent
(up 0.5 percentage points), Calgary 34.9 per cent (down 3.1
percentage points) and Edmonton 31.0 per cent (down 2.4 percentage
points).
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: Buying a home in B.C. became
slightly more affordable in the fourth quarter of 2010,
due primarily to a small drop in mortgage rates. After experiencing
some declines in the previous quarter, home prices rose
modestly for most housing categories; condominium apartments
bucked the trend, however, and depreciated slightly. Prices
were supported by a tightening in market conditions with
home resales picking up smartly following substantial cooling
in the spring and summer that saw sellers lose their edge
in setting property values. Demand and supply in the province
are judged to be quite balanced at this point. RBC's Affordability
Measures fell between 0.8 and 1.0 percentage points in the
fourth quarter which came on the heels of much more substantial
drops (1.7 to 4.8 percentage points) in the third quarter.
Notwithstanding these declines, affordability remains poor
and will weigh on housing demand going forward.
- Alberta: Alberta officially became the most affordable
provincial market in the country in the fourth quarter,
according to the RBC Measures which fell once again by 1.0
to 2.4 percentage points, extending their declines since
late-2007. In addition to the lower mortgage rates, the
further depreciation of home prices contributed to lowering
homeownership costs. Property values were negatively affected
by a substantial downswing in demand in the spring and early
summer, which put buyers in the drivers' seat. The significant
improvement in affordability is near the end of its line,
however, as demand has shown more vigour in recent months
- alongside a provincial economy that is gaining more traction
- and the market has become better balanced. RBC expects
that this will stem price declines this year, thereby removing
a potential offset to the negative effect of projected rise
in interest rates on affordability.
- Saskatchewan: The provincial housing market finished
2010 on an enviable note as affordability improved even
though home prices, for the most part, rose slightly in
the fourth quarter. Generally, the price increases more
than reversed declines in the previous period but were too
small to negate the beneficial effect of lower mortgage
rates. The home resale market gained back solid forward
momentum in the second half of 2010, notwithstanding some
softening in the final months, which re-established a stronger
balance between demand and supply. The RBC Measures fell
between 0.6 and 1.1 percentage points in the quarter, although
the levels continue to be modestly above historical averages
in the province. RBC projects the Saskatchewan market will
take its current affordability position in stride as a rebound
in provincial economic growth and continued strong migration
inflows will support housing demand this year.
- Manitoba: Manitoba's market enjoyed the best of
both worlds in the fourth quarter of 2010 as home price
were higher but ownership costs were lower. Thanks to lower
mortgage rates in the quarter and continued growth in household
income, the negative effect of small gains in property values
on affordability was more than offset. The RBC Measures
eased between 0.1 and 0.6 percentage points in the fourth
quarter, keeping Manitoba among the only two provincial
markets in Canada (with Alberta) in which Affordability
Measures stand below long-term averages for all housing
categories. Sales of existing homes ramped up considerably
in the fall, reaching near historical peaks by December.
Housing demand is being boosted by the strongest net international
immigration in the province since the mid 1950s and by improved
job prospects - Manitoba boasts the lowest unemployment
rate in Canada (as of the fourth quarter of 2010) and RBC
expects this to continue in 2011.
- Ontario: Concerns last year that the housing market
would falter have now largely dissipated as home resale
activity picked up smartly in the fall and property values
resumed their appreciation trend in the closing months of
2010. The slowdown in market activity in the spring and
summer last year largely reflected various transitory factors
- including the introduction of the HST and changes in mortgage
lending rules - that brought demand forward to the start
of the year. The silver lining of this slowdown, however,
has been an improvement in affordability. The RBC Measures
edged lower for the second consecutive time for most housing
categories in the fourth quarter, down by 0.2 to 0.3 percentage
points. The only exception was two-storey homes, which became
marginally less affordable amid notable price gains. RBC
expects affordability will play a neutral role for demand
in Ontario with RBC Measures close to their long-run average.
- Quebec: Higher home prices in the fourth quarter
of 2010 caused some deterioration in affordability following
meaningful improvement in the previous period. Home resales
strengthened in the latter part of 2010, contributing to
tightened market conditions that gave sellers a stronger
hand in negotiating prices, particularly for two-storey
homes. Price gains and rising household income dominated
the positive effects of lower mortgage rates on affordability
in the fourth quarter for all housing types except detached
bungalows (where a small improvement was registered). RBC
Measures rose marginally by 0.1 to 0.2 percentage points
for two-storey homes and condominium apartments, and fell
by 0.6 percentage points for detached bungalows; however,
the levels of all Measures still modestly exceeded long-term
averages in the province. RBC expects that modestly strained
affordability in Quebec will further deteriorate in the
period ahead when interest rates rise.
- Atlantic Canada: Home resale activity sputtered
late in 2010 and reversed some of the gains achieved at
the end of the summer and early fall. This has not disrupted
property values in the fourth quarter as home prices generally
appreciated; yet, housing affordability improved for most
housing categories because declines in interest rates provided
a dominant offset. Only condominium apartments saw a slim
deterioration in affordability as the RBC Measures rose
by 0.1 percentage point compared with declines of 0.5 percentage
points for detached bungalows and two-storey homes. Affordability
levels continue to be mostly attractive in Atlantic Canada
from both historical and cross-country perspectives. RBC
projects that is likely to remain so in the near-term despite
our expectation of higher interest rates. Market conditions
have recently swung in favour of buyers which will exert
downward pressure on prices in coming months.
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.
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For more information, please contact:
Robert Hogue, RBC Economics Research, 416-974-6192
Elyse Lalonde, Media Relations, RBC, 416-974-8810
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