Rising Home Prices Eroding Housing Affordability
in Canada: RBC Economics
TORONTO, May 20, 2011 Canadian housing
affordability eroded in the first quarter of 2011, following
improvements in the last half of 2010, according to the latest
Housing Trends and Affordability report released today by
RBC Economics Research. Home price gains in the majority of
Canada's key markets were the main driver of the decline in
housing affordability, while flat mortgage rates played a
neutral role this time. In the previous two quarters, declines
in mortgage rates were the principal source of improvement
"We expect that the Bank of Canada will soon resume
its campaign to normalize its interest rate policy, which
will adversely impact housing affordability in Canada,"
said Robert Hogue, senior economist, RBC. "Continued
growth in household incomes, however, will likely soften the
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 first quarter
of 2011, measures at the national level inched higher for
all three major housing types tracked by RBC (increases represent
a deterioration in affordability).
The detached bungalow benchmark measure rose by 0.7 of a
percentage point to 40.5 per cent, while both the standard
two-storey home and the standard condominium measure rose
by 0.2 of a percentage point, to 46.2 and to 27.7 per cent
respectively, in the first quarter.
""Interest rates will likely soon start to rise
again, leading to a period of steady increases in homeownership
costs. This, in turn, will contribute to a flattening in Canadian
housing demand going forward," said Hogue. "We could
experience some turbulence this spring and summer, given that
new tighter mortgage lending rules in March and April likely
shifted home buying activity to earlier in the year."
The majority of Canadian markets experienced weakened affordability
in the first quarter of 2011. Most notable was the sizeable
deterioration in British Columbia. More specifically, Vancouver
saw significant gains in property values, which drove the
already elevated cost of homeownership even higher. Quebec's
homebuyers also faced noticeable rises in ownership costs,
while those in Atlantic Canada saw their affordability advantage
somewhat diminish. The picture remained mixed in other areas
of the country, with Ontario, Alberta and Saskatchewan experiencing
ups and downs in ownership costs, depending on the housing
"Despite the latest erosion in affordability, provincial
levels generally continue to stand near their long-term averages,
suggesting that owning a home remains affordable or, at worst,
slightly unaffordable across Canada - with Vancouver being
a notable exception," said Hogue.
RBC's housing affordability measure for a detached bungalow
in Canada's largest cities is as follows: Vancouver 72.1 per
cent (up 3.4 percentage points from the last quarter), Toronto
47.5 per cent (up 0.8 of a percentage point), Montreal 43.1
per cent (up 2.0 percentage points), Ottawa 39.0 per cent
(up 0.4 of a percentage point), Calgary 35.9 per cent (up
0.9 of a percentage point) and Edmonton 31.5 per cent (up
0.5 of a percentage point).
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:
Columbia: Strong home price increases reduced affordability
in the province in the first quarter. The RBC measures for
British Columbia rose between 0.8 of a percentage point
and 1.8 percentage points, the most significant increases
of all the provinces. The lack of affordability will continue
to weigh on local demand and could potentially cause painful
market disruptions in the period ahead.
- Vancouver affordability continued to wane, as measures
climbed between 1.0 percentage point and 3.4 percentage
points, and moved closer to all-time highs.
Stable or slightly declining prices, contributed to substantial
improvements in affordability in Alberta last year. While
market conditions have become more balanced in recent months,
there remains very little pricing momentum in the province.
The RBC measures for all housing categories in Alberta stood
below their long-term average in the first quarter.
- There are tentative signs that the Calgary market
is finally firming up. Area homebuyers are benefiting
from attractive affordability, which remained the best
among Canada's major cities.
Following solid performance in the second half of last year,
some softening in property values in the early months of
2011 led to a further decrease in the cost of owning a home
in Saskatchewan. The RBC measures for bungalows and two-storey
homes fell by 0.7 of a percentage point in the first quarter,
representing a third consecutive quarterly improvement in
affordability. Condominium apartments bucked this trend
and saw their affordability modestly deteriorate in the
face of higher prices.
Housing affordability continues to be attractive in Manitoba,
with little change registered in the first quarter. Measures
rose by 0.1 of a percentage point for detached bungalows,
declined by 0.2 of a percentage point for condominium apartments
and stayed even for two-storey homes. Manitoba is still
one of only two provincial markets (alongside Alberta) where
affordability measures stand below long-term averages for
all housing categories.
In the first quarter of 2011, home resales in Ontario increased
at a sustained and yet subdued rate, while home prices rose
modestly overall. Affordability stood very close to long-term
averages, leaving homebuyer demand largely unchanged in
RBC measures went up for bungalows and condominiums (by
0.5 and 0.1 of a percentage point, respectively), but
down for two-storey homes (by 0.6 of a percentage point).
Market activity in Ontario is likely to face some headwinds
in coming months, given the latest changes in mortgage
lending rules and the expected rise in interest rates.
- Somewhat tense market conditions in Toronto further
fuelled appreciation in property values and led to an
erosion in affordability, as RBC measures for detached
bungalows and condominium apartments rose by 0.8 and
0.1 of a percentage point respectively.
- Ottawa measures increased modestly for detached bungalows
and two-storey homes, while they remained the same for
condominium apartments. As most measures have moved
above long-run averages, any further deterioration in
affordability will likely act to restrain demand in
Quebec homebuyers faced higher ownership costs in the first
quarter, which weighed significantly on affordability. RBC
measures rose by 1.1 percentage points for detached bungalows
and 1.3 percentage points for two-storey homes, both representing
the second largest increases behind those recorded in British
Columbia. All measures in Quebec stand slightly above their
long-term averages, corresponding to a moderate strain in
affordability in the province.
- Montreal's affordability measures rose between 0.1
of a percentage point and 2.8 percentage points in the
first quarter of 2011, pushing levels for all housing
types above national and long-term averages for the
Canada: In the first quarter, rebounding housing
market activity has boosted property values in Atlantic
Canada. Home resales in the region climbed solidly for the
second consecutive period and further reversed some of the
declines that occurred last year. The downside has been
a modest fall in the region's affordability position. Affordability
measures for Atlantic Canada increased between 0.6 and 0.9
of a percentage point in the latest period, although levels
hovered near long-term averages and remained among the lowest
in the country.
The full RBC Housing Trends and Affordability report is available
online, as of 8 a.m. ET today at www.rbc.com/economics/market/
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Robert Hogue, RBC
Economics Research, 416-974-6192
Media Relations, RBC, 416-974-8810