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 in affordability.
"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 blow."
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 type.
"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:
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.
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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