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Canada's Housing Affordability Dips for Second Straight Quarter: RBC Economics

Extremely poor affordability in Vancouver skews national picture

TORONTO, August 22, 2011— As a result of higher home prices and mortgage rate increases, Canada's housing affordability has slipped for a second consecutive quarter this year, according to the latest Housing Trends and Affordability report released today by RBC Economics Research. Most local housing markets across Canada continue to be reasonably affordable or at worst, slightly 'unaffordable', despite this recent deterioration. Vancouver is the major exception.

"By and large, the share of household budgets, taken up by the costs of owning a home at current market values, remains close to historical norms," said Craig Wright, senior vice-president and chief economist, RBC. "However, extremely poor and rapidly eroding affordability in the Vancouver-area market is somewhat skewing the national picture."

The RBC housing affordability measure captures the proportion of pre-tax household income that would be needed to service the costs of owning a specified category of home at going market values. During the second quarter of 2011, measures for the national level rose for all housing categories tracked by RBC (a rise represents a loss of affordability).

Housing Category

Percentage of household income required to service ownership costs

Change since previous quarter (percentage points)

Condominium apartment

29.2

+0.8

Detached bungalow

43.3

+1.7

Two-storey home

49.3

+1.8

Since the start of 2011, the Greater Vancouver Area directly accounted for up to one-third of the deterioration in affordability at the national level. Vancouver's market continues to be in a class by itself for unaffordable housing. Strong demand in higher-end pockets of this particular market has catapulted prices to unprecedented levels.

"Vancouver's housing market is without a doubt the most stressed in Canada and is facing the highest risk of a downturn," added Wright.

Market segments that also faced some affordability pressures in the second quarter included: the two-storey home category in Quebec (Montreal), Ontario (Ottawa and Toronto) and Saskatchewan. At the other end of the spectrum, Alberta remains an attractive province to would-be homebuyers, as owning a home in a market such as Calgary is very affordable.

"Renewed turmoil in global financial markets has caused heightened uncertainty with respect to the pace of global growth and we need to factor this into our outlook for the Canadian housing market," said Wright. "However, this volatility might have a silver lining; housing affordability in Canada may not deteriorate as quickly or by as much as we previously expected."

In light of these new global developments, RBC has revised their call for an impending interest rate hike until the middle of 2012. This will work to reduce pressure on near-term affordability through lower mortgage interest payments than would have been the case otherwise.

"What is less transparent is the degree to which affordability will be affected," explained Wright. "Our latest forecast had home prices hitting a plateau later this year and continuing into 2012. The postponement of interest rate increases might motivate homebuyers to stay active longer, extending the current upward momentum in prices and, in turn, acting as an element eroding affordability."

RBC's housing affordability measure for the benchmark detached bungalow in Canada's largest cities is as follows: Vancouver 92.5 per cent (up 10.4 percentage points from the previous quarter), Toronto 51.9 per cent (up 2.0 percentage points), Montreal 42.6 per cent (up 1.4 percentage points), Ottawa 41.2 per cent (up 1.3 percentage points), Calgary 37.1 per cent (up 0.6 percentage points) and Edmonton 33.8 per cent (up 0.6 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 based on going market values. 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: Affordability in the province deteriorated as home values appreciated further in the second quarter. The primary contributor to this significant decline was hefty price gains for bungalows. Measures for B.C. rose between 1.0 and 5.7 percentage points in the quarter - the largest increases in the country.
    • Vancouver's sky-high market valuations drove B.C.'s affordability measures to their worst levels on record at 92.5 per cent.

  • Alberta: Housing affordability continues to be attractive in Alberta despite rises in measures - the lowest among provinces between 0.5 and 1.3 percentage points. Homebuyer demand has been stuck in low gear; existing home sales, new home construction and home prices continue to exhibit flat trends. Going forward, attractive affordability, robust growth and rising employment will act to shore up confidence in Alberta's housing market.
    • Home resales in Calgary edged lower in the second quarter, providing little pressure on prices and affordability overall. The RBC affordability measures rose between 0.4 and 1.1 percentage points, representing the smallest deterioration among major cities. Strong economic fundamentals in both Calgary and Alberta will support homebuyer demand in the period ahead.

  • Saskatchewan: Price increases for two-storey homes and bungalows weighed on Saskatchewan's housing affordability in the second quarter. RBC measures for these two categories rose the most in more than two years - by 2.8 percentage points and 2.0 percentage points, respectively. At this point, affordability levels have moved further above long-term averages for the province, potentially causing some strain for homebuyers.

  • Manitoba: Housing affordability has continued along in the 'neutral zone' in Manitoba this quarter. RBC measures experienced a modest deterioration in the latest quarter - ranging from 0.7 to 1.2 percentage points. This rise in homeownership costs may have contributed to cooling in spring home resale activity, though major flooding in the province likely caused some disruptions in certain areas. Before spring, Manitoba's existing home sales registered the best first quarter ever, led by strong gains in Winnipeg.

  • Ontario: Although existing home sales eased in the second quarter, sellers remained in the driver's seat in many local Ontario markets, leading to continued house price increases. This raised the cost of homeownership in the province. RBC measures increased between 1.1 and 2.0 percentage points, further reversing some of the declines registered in the latter half of last year. Still, affordability in the province is not being overly strained.
    • In the second quarter, slim availability of homes for sale in Toronto allowed for sellers to have a strong hand in the price-setting process. In spite of a decline in affordability, Toronto-area homebuyers remained motivated. Second quarter RBC measures rose between 1.2 and 2.9 percentage points.
    • So far this year, homebuyer demand has softened in the Ottawa area. Second quarter costs of owning a home rose for the third straight quarter, as property values appreciated moderately across all housing types. RBC measures for Ottawa increased between 0.7 and 1.3 percentage points this quarter.

  • Quebec: Affordability has been a mixed bag in Quebec so far this year. The cost of owning freehold homes slipped for two successive quarters and the cost of owning a condominium apartment did not change materially. In the second quarter, RBC measures for bungalows and two-storey homes climbed 1.0 and 1.8 percentage points, respectively. The measure for condos barely rose (up only 0.2 percentage points). Divergent affordability patterns were reflected in home prices.
    • It has become increasingly more difficult to afford a home in the Montreal area. In the second quarter, the RBC measures rose for all housing types, indicating further deteriorating affordability. Over the past year, price increases led to Montreal losing its status as one of Canada's most affordable cities. This did not seem to concern homebuyers as they increased their purchases of homes for the second consecutive quarter.

  • Atlantic: Rather flat market activity kept gains in property values in Atlantic Canada at bay, which limited the deterioration in housing affordability in the second quarter. RBC measures rose between 0.9 and 1.2 percentage points across the region. Atlantic Canada continues to have a long-standing affordability advantage relative to most other Canadian markets. The Atlantic Canada market was resilient during the 2008-2009 downturn and is well positioned to weather possible adversity going forward.
    • Several local markets in the region experienced a slowing in resale activity, including Halifax, St. John's and Saint John. Moncton, on the other hand, saw meaningful gains in the second quarter.

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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For more information, please contact:

Craig Wright, Senior Vice-President and Chief Economist, RBC, 416 974-7457
Robert Hogue, Senior Economist, RBC Economics Research, 416 974-6192
Elyse Lalonde, Manager, Media Relations, RBC, 416 974-8810

 

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