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Canada's Housing Affordability Trending #Directionless: RBC Economics

RBC Economics - Where Housing Affordability Stands in Canada Benchmark Detached Bungalow - Third Quarter 2012

TORONTO, November 22, 2012— Canada's housing market became more affordable in the third quarter of 2012 as a result of modest declines in home prices and further gains in household incomes, according to the latest Housing Trends and Affordability Report issued by RBC Economics Research. The longstanding affordability trend, however, is less clear.

"The broad affordability picture has been somewhat stationary over the last two years, alternating between periods of improvement and deterioration, resulting in an affordability trend that is, on net, essentially flat," said Craig Wright senior vice-president and chief economist, RBC. "We saw this directionless trend in the third quarter as housing affordability fully reversed the mild erosion witnessed in the first half of the year."

RBC notes that Canada's housing market cooled further in the third quarter. This was in part because of the effects of a fourth round of rule changes to government-backed mortgage insurance, which effectively raised the bar for first-time homebuyers. RBC expects the restrictive effects from these modifications to ease by the end of the year and that resale activity will stabilize in 2013.

Exceptionally low interest rates have been the key factor in keeping affordability levels from reaching dangerous heights in Canada in recent years. RBC indicates that as interest rates are currently at generational lows, the scope for increases is substantial in the coming years.

"Assuming that the European crisis remains somewhat in check, and that the U.S. fiscal challenges are addressed, we anticipate that the Bank of Canada will begin gradually raising the overnight rate in the second half of next year," added Wright. "This, along with the expected continued growth in household income, will lessen the risk of marked erosion in affordability."

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 third quarter of 2012, measures at the national level fell in all three categories of homes tracked (a decline represents an improvement in affordability). RBC's measure for the benchmark detached bungalow edged lower by 1.0 percentage point to 42.0 per cent, while the two-storey homes category fell by 1.2 percentage points to 47.8 per cent; the measure for condominium apartments eased by 0.6 percentage points to 28.0 per cent.

In spite of this improvement, RBC measures continue to modestly exceed their long-term averages, though national figures are somewhat inflated by extremely poor affordability in the Vancouver-area market.

"The cost of owning a home took a smaller bite out of household pocketbooks in the third quarter as home prices fell - most notably in the Vancouver area, though it remains the least affordable market in Canada by a wide margin," explained Wright.

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 83.2 per cent (down 5.8 percentage points from the previous quarter); Toronto 52.4 per cent (down 0.7 percentage points); Montreal 40.2 per cent (up 0.1 percentage points); Ottawa 38.7 per cent (down 0.4 percentage points); Calgary 38.3 per cent (down 0.7 percentage points) and Edmonton 31.1 per cent (down 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) 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 hurdles still tough to clear
    British Columbia's housing market experienced improvements in the third quarter of 2012, and yet, affordability conditions remained the poorest across Canada. RBC measures fell between 2.0 percentage points and 3.7 percentage points, the largest drops across Canada. The situation remains less severe elsewhere in the province; the share of income needed to carry ownership costs in Victoria, for instance, is almost half the share in Vancouver for some housing types.

  • Alberta: Attractive affordability contributes to market renaissance
    Alberta's housing market enjoyed firm and steady resale activity, balanced demand-supply conditions, moderate home price increases, and improved housing affordability. Third quarter affordability measures for the province edged lower - between 0.2 percentage points and 0.4 percentage points -remaining below their long-term and the national averages.

  • Saskatchewan: Little evidence of affordability strain
    Significant deteriorations in housing affordability in the second quarter in Saskatchewan were largely reversed in the third with RBC measures in the province falling between 0.9 percentage points and 1.3 percentage points. The measures stood just slightly above their long term averages for all housing categories, indicating little in the way of undue affordability induced strain on the market.

  • Manitoba: Market losing some of its steam; minimal pressure on affordability
    Declining housing prices spurred a notable improvement in housing affordability in Manitoba over the third quarter. RBC measures fell between 0.6 percentage points and 1.6 percentage points, which fully unwound the deterioration that occurred in the prior quarter. Provincial affordability levels sit slightly higher than their averages since the mid 1980s, but remain well below the corresponding national averages.

  • Ontario: More balanced conditions help to ease affordability stress
    Ontario's housing affordability eased somewhat in the third quarter, but remains under mild pressure, most notably in the two-storey home segment. RBC measures declined between 0.5 percentage points and 1.1 percentage points in the province, which, in effect, rolled back the two consecutive quarterly increases that took place in the first half of this year.

  • Quebec: Second straight affordability improvement
    Housing affordability improved for the second straight quarter in Quebec, with RBC's measures edging lower across all housing types in the province, between 0.6 percentage points and 0.8 percentage points, in the third quarter. For the most part, levels are only slightly worse than the average historical level, indicating that prospective homebuyers in Quebec may feel minimally stretched budget-wise, if they bought a home at current market prices.

  • Atlantic: Affordability position remaining quite stable
    Housing affordability in Atlantic Canada improved slightly across the board, with RBC measures in the region inching lower by 0.2 percentage points to 0.7 percentage points relative to the previous quarter. Affordability measures have been reasonably stable over the past three years in the region, showing no discernable trends on either the up or down sides.

The full RBC Housing Trends and Affordability report is available online, as of 7 a.m. ET today, at

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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, Corporate Communications,
RBC Capital Markets, 416 842-5635


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