Vancouver market continues to test the limits of affordability
RBC Economics: Where Housing Affordability Stands in Canada
Benchmark Detached Bungalow - Second Quarter 2012
TORONTO, August 27, 2012 Canada's housing market became slightly less affordable for the second consecutive quarter, according to the latest Housing Trends and Affordability Report released today by RBC Economics Research.
"Market conditions remained fairly balanced across the country in the second quarter, laying the groundwork for further price increases, which in turn contributed to a decrease in affordability," said Craig Wright, senior vice-president and chief economist, RBC. "Going forward, we anticipate that the latest mortgage insurance rule changes and prospects for further erosion in affordability will restrain homebuyer demand in Canada."
RBC notes that exceptionally low interest rates have been the most important factor in keeping affordability from reaching dangerous levels in recent years. Affordability-related pressures, therefore, could well intensify next year, should interest rates begin to rise.
"Assuming the European crisis remains contained and fiscal challenges in the U.S. are addressed, we expect the Bank of Canada to start normalizing interest rates early next year. This could cause further deterioration in affordability," explained Wright.
"We think that the central bank will proceed gradually with rate increases and that household income will continue to grow. Both of these factors should lessen the negative impact on the housing market."
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 2012, measures at the national level edged higher for detached bungalows and two-storey homes by 0.2 and 0.6 percentage points to 43.4 per cent and 49.4 per cent respectively (an increase in the measure represents deterioration in affordability). The measure for condominium apartments was unchanged at 28.8 per cent.
Over the past two quarters, erosion in the single family home categories pushed the level of these measures further above their long-term averages in Canada. However, national figures are somewhat exaggerated by extremely poor affordability in the Vancouver area.
"The degree to which the most recent levels exceed historical averages is smaller if Vancouver is excluded from the calculations, especially in the case of detached bungalows, while the measure for two-storey homes is somewhat elevated in comparison to the long-run average," added Wright. "This likely signifies that some affordability-related stress is building in this category across Canada. On the other hand, any such stress appears to be minimal at most for condominium apartments."
Where housing affordability stands in Canada:
RBC's housing affordability measure for the benchmark detached bungalow in Canada's largest cities is as follows: Vancouver 91.0 per cent (up 2.2 percentage points from the previous quarter); Toronto 54.5 per cent (up 0.9 percentage points); Ottawa 41.9 per cent (unchanged); Montreal 40.4 per cent (down 1.0 percentage points); Calgary 36.7 per cent (unchanged) and Edmonton 32.4 per cent (down 0.1 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) at market value. Alternative housing types are also presented, including a standard two-storey home and a standard condominium apartment. The higher the reading, the more difficult it is to afford a home at market values. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, would take up 50 per cent of a typical household's monthly pre-tax income.
Highlights from across Canada:
- British Columbia: Affordability situation less severe outside Vancouver
Owning a home at market prices stretched the budgets of B.C.'s households even more in the second quarter of 2012. Affordability remains poor in the province, with RBC measures rising between 0.2 and 1.2 percentage points, although this largely reflects the extremely unaffordable conditions in the Vancouver-area market. The situation is much less severe elsewhere in the province.
- The Vancouver-area continues to be the least affordable market in Canada by a considerable margin. RBC's measures deteriorated further for all types of housing in the area, standing close to the worst levels on record.
- Alberta: Lower utility costs help affordability
Markets in Alberta defied the national trend in the second quarter, experiencing widespread improvements in affordability, thanks to significant drops in the prices for electricity and natural gas. RBC measures eased between 0.3 and 0.6 percentage points, to levels well below their long-run averages.
- Calgary's housing market enjoyed stronger home resales and building activity, as well as moderately rising prices, and continues to register one of the most attractive affordability levels among Canada's largest cities.
- Saskatchewan: Strong price increases dent affordability
Brisk housing activity over the past year has considerably tightened market conditions and applied upward pressure on home prices in the province, leading to some of the bigger deteriorations in affordability across Canada in the second quarter. The RBC measure for two-storey homes surged by 2.8 percentage points, while measures for condominium apartments and detached bungalows climbed 1.6 and 1.4 percentage points respectively.
- Manitoba: Homeownership costs remain manageable despite slip in affordability
Strong activity in Manitoba's housing market in the second quarter led to a notable erosion in affordability. Still, households face some of the lowest ownership costs as a share of their income in Canada. RBC measures rose between 0.4 and 1.9 percentage points in the province, to stand slightly above their historical average.
- Ontario: Slowly deteriorating affordability trends live on
Ontario's homeownership costs rose in the most recent quarter, extending the gradually rising trend seen since 2009. RBC measures increased between 0.1 and 0.8 percentage points, modestly exceeding their long-term average.
- The Toronto area market saw modest deterioration in affordability for the second straight quarter. Homeownership costs consumed a larger share of household income in comparison to the historical average, revealing the presence of some greater-than-usual stress in the market, though mostly in single family home categories. Such stress will weigh on homebuyer demand in the period ahead. Meanwhile, market activity has cooled several degrees in recent months and the earlier tightness has eased.
- There was no change in homeownership costs as a share of household income in the Ottawa area market in the second quarter. RBC measures continue to stand above their long-run average and near their historic peaks, representing a greater-than-normal strain on Ottawa homebuyers. While second quarter existing home sales recorded the third-best ever pace in the area, the market's momentum has shifted down from the brisk pace recorded last year.
- Quebec: Affordability trending sideways
Affordability measures in the province trended sideways in the second quarter, moving in the opposite direction of changes registered in the previous period. Following widespread increases earlier this year, RBC measures declined for detached bungalows (0.7 percentage points) and condominium apartments (0.5 percentage points), while the measure for two-storey homes edged higher by 0.2 percentage points for the second consecutive quarter.
- In Montreal, the RBC measures remain roughly in line with historic norms for most housing categories. However, the measure for the two-storey homes segment remained notably above its long-term average, indicating that greater-than-usual tensions will likely persist.
- Atlantic: Long-standing favourable affordability position maintained
Moderate affordability deterioration in the Atlantic region continued in the second quarter, with RBC measures rising between 0.3 and 0.7 percentage points, within close range of their long-run averages.
The full RBC Housing Trends and Affordability report is available online, as of 7 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, 416 974-6192
Elyse Lalonde, Manager, Corporate Communications,
RBC Capital Markets, 416 842-5635