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Canada's housing affordability improves in Q2 2014: RBC Economics

TORONTO, August 28, 2014 -  Canada’s housing became more affordable in the second quarter of 2014 thanks in large part to a decline in mortgage rates, according to the latest Housing Trends and Affordability Report issued by RBC Economics Research.

“It was more affordable to own a home in virtually all provincial and major local markets across Canada in Q2, and in the face of solid price gains no less,” said Craig Wright, senior vice-president and chief economist, RBC. “We had anticipated a rebound in activity from earlier this year when the harsher than normal winter weather took hold, but the biggest drop in fixed mortgage rates in almost four years and resulting improvement in affordability also gave the Canadian housing market a boost of extra energy.”

In May and June, Canada’s home resales picked up and contributed to a 9.4 per cent seasonally-adjusted advance in the second quarter, which was the strongest quarterly gain in nearly four years. RBC says that unadjusted for seasonal factors, resales in Q2 were the second-best ever on record.

The RBC report indicates that sellers also came out from the sidelines with a surge in new listings by 8.0 per cent in the second quarter, following three consecutive quarterly declines. Greater supply of homes for sale helped to unclog markets such as Toronto, where a lack of ‘quality’ listings earlier this year stifled activity.

“Stats rolling in suggest that the upward momentum in Canada’s housing market is being sustained and further, that a sharp slowdown is not imminent,” said Wright. “In the coming year however, we do expect the market will gear down its resale levels and that the rate of price increases will soften.”

The report says that Canada’s historically low interest rates are not sustainable and expects that longer term rates will begin to rise later this year in anticipation of the Bank of Canada’s move to tighten policy in 2015. It adds that  rising rates would erode housing affordability across Canada and weigh on homebuyer demand; though continued growth in household income would somewhat offset the impact.

“We remain of the view that any rise rates will be gradual and unlikely to unhinge either overall affordability levels or the market – we expect a cooling in activity, not a crash,' added Wright.

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 current market values (a fall in the measure represents an improvement in affordability).

During the second quarter of 2014, affordability measures at the national level fell by 0.9 percentage points to 48.0 per cent for two-storey homes, by 0.6 percentage points to 42.5 per cent for detached bungalows and by 0.4 percentage points to 27.4 per cent for condominium apartments.

The RBC report says that affordability levels in Canada remain little changed from where they were a year ago with the overall trend for the past few years remaining stable. At the local level, Vancouver continues to experience sky-high prices – especially for single-family homes – and the poorest affordability levels in the country. Toronto sees deteriorating trends in affordability with levels becoming increasingly strained, predominantly for single-family homes. RBC says that virtually all other markets across Canada stand at levels close to historical averages, which indicates that negative affordability-related pressures should not impact homebuyer demand at this stage.

RBC’s housing affordability measure for the benchmark detached bungalow in Canada’s largest cities in the second quarter of 2014 is as follows: Vancouver 81.8 (down 0.3 percentage points from the previous quarter); Toronto 55.9 (down 0.2 percentage points); Montreal 37.3 (down 1.6 percentage points); Ottawa 36.0 (down 0.4 percentage points); Calgary 33.6 (down 0.8 percentage points); Edmonton 31.7 (down 1.1 percentage points).

The RBC Housing Affordability measure, which has been compiled since 1985, is based on the calculated 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.

It is important to note that RBC’s measure is designed to gauge ownership costs associated with buying a home at present market values. It is not a representation of the actual costs incurred by current owners, the vast majority of whom have bought in the past at significantly different values than those prevailing in the latest period.

Highlights from across Canada:

British Columbia: affordability broadly improves

  • Housing affordability in the province improved across the board in the second quarter, with two-storey homes and condos reaching their most attractive levels since late 2009. RBC’s affordability measures for B.C. fell between 0.9 and 2.0 percentage points. Still, owning a home at market price in an area such as Vancouver continued to be very difficult for an average household to afford.

Alberta: housing affordability remains attractive

  • Escalating prices in the province were largely taken in stride by Alberta homebuyers in Q2 as lower mortgage rates and solid growth in household incomes provided offset. Affordability in the province improved modestly with RBC measures easing between 0.2 and 0.9 percentage points.

Saskatchewan: homebuyers face little undue affordability pressure

  • The provincial housing market rebounded strongly in the second quarter with home resales jumping to a new record-high. At the same time, RBC’s affordability measures for Saskatchewan fell between 1.3 and 0.8 percentage points, and stood close to their historical averages.

Manitoba: new home listings surge; affordability plays largely neutral role

  • The big housing market story in Manitoba was a surge of homes being offered for sale with new listings growing to levels almost 14 per cent above where they were a year ago. RBC’s affordability measures fell between 0.5 and 1.5 percentage points but remained close to long-run averages, suggesting that affordability likely plays a neutral role in home buying decisions in the province.

Ontario: homebuyers undisturbed by affordability strains

  • Housing affordability changed very little in Ontario in the second quarter and homebuyers did not appear to be overly concerned by the fact that affordability remained somewhat stretched for single-family homes. Lower rates were the main factor contributing to marginal declines in RBC’s measures for Ontario, which edged lower between 0.1 and 0.2 percentage points.

Quebec: improved affordability helps halt housing market slide

  • Quebec’s housing market activity, which had been falling since early 2012, stabilized in Q2. Home resales rose modestly and the supply of homes for sale grew. Second quarter affordability measures for the province eased for all housing types – between 0.9 and 1.8 percentage points. This improvement in affordability likely helped stabilize the market at the margin in the latest quarter.

Atlantic Canada: attractive affordability conditions

  • The region’s housing affordability conditions improved quite noticeably in the second quarter thanks to lower mortgage rates and subdued price pressures. RBC’s measures for Atlantic Canada dropped between 0.9 and 1.8 percentage points.

The full RBC Housing Trends and Affordability report is available online as of 8 a.m. ET today.

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For more information, please contact:
Craig Wright, Chief Economist, RBC Economics Research, 416-974-7457
Robert Hogue, Senior Economist, RBC Economics Research, 416-974-6192
Elyse Lalonde, Communications, RBC Capital Markets, 416-842-5635