TORONTO, May 23, 2013 Canada's housing market remained under moderate affordability-related stress in the first quarter of 2013, as housing affordability stayed in the holding pattern that began in early 2010, according to the latest Housing Trends & Affordability Report issued by RBC Economics Research. Housing affordability was largely unchanged in the latest period, as it was largely the status quo for mortgage rates, home prices and household incomes.
"The Canadian housing market cooled significantly in the past year; however, there is mounting evidence that activity is no longer weakening," said Craig Wright, senior vice-president and chief economist, RBC. "A significant nation-wide price correction does not appear to be imminent so long as affordability remains outside of the danger zone."
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 (a rise in the measure represents deterioration in affordability).
During past housing market downturns in Canada, RBC estimates that the measure for the benchmark detached bungalow most often climbed above the 44.5 per cent mark before prices fell more than 5.0 per cent (peak to trough). At 42.5 per cent (up by 0.3 percentage points) in the first quarter of this year, the bungalow measure remained below this critical threshold.
During the first quarter of 2013, measures at the national level were unchanged in the two other categories of homes tracked. RBC measures for the standard two-storey home and condominium apartment categories remained at 48.0 per cent and 28.1 per cent, respectively.
Exceptionally low mortgage rates have been the chief factor in keeping homeownership costs relatively affordable, RBC says.
"While affordability levels are manageable at this point, we'd be humming a very different tune if interest rates were to suddenly rise substantially. Fortunately, the likelihood of a surge in rates is slim at this stage," said Wright. "We believe that the more probable scenario in Canada is one of low interest rates over the next two years; we expect the Bank of Canada to begin gradually raising the overnight rate in mid-2014."
RBC notes that when interest rates eventually rise, it will be because the Canadian economy is on stronger footing. Part and parcel of this stronger economic environment will be heftier household income gains, which would work to offset any negative impact on affordability.
The housing market is clearly cooler than it was just a year ago; home resales were down 13 per cent nationally in the first quarter of this year relative to the same period in 2012. RBC notes that much of the decline took place in the months following the latest changes to government-insured mortgage insurance rules implemented in July. Activity appears to have stabilized since then - first-quarter resales were unchanged from the fourth quarter of 2012.
Home prices in Canada gave up some ground after a peak in June of 2012, but have generally held up so far in 2013, thanks to predominantly balanced markets in Canada. RBC says that in the past year as demand cooled, the supply of homes for sale also curbed, helping to maintain balanced conditions.
RBC expects market activity to remain subdued this year. However, as the negative effects of the mortgage insurance rule changes gradually dissipate, there could be a mild strengthening from recent monthly levels.
In Canada's local markets, there were some divergences in affordability trends in the first quarter of 2013, but, in most cases, changes were minimal. Vancouver continues to be the least affordable market in the country by far. RBC notes that, to a lesser extent, Toronto and Montreal are other city markets showing signs that homeownership is a bit of a stretch for a typical household budget - particularly in the single-family home segments. Other local markets tracked by RBC stand within historically safe ranges.
RBC's housing affordability measure for the benchmark detached bungalow in Canada's largest cities is as follows: Vancouver 82.3 per cent (up 0.1 percentage points from the previous quarter); Toronto 53.8 per cent (up 0.8 percentage points); Montreal 40.1 per cent (up 0.6 percentage points); Ottawa 39.1 per cent (up 0.1 percentage points); Calgary 38.7 per cent (up 0.8 percentage points); Edmonton 30.4 per cent (down 0.2 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 8 a.m. ET today, at 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