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,"
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:
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 Economics Research,
Elyse Lalonde, Manager, Corporate Communications,
RBC Capital Markets, 416 842-5635