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Home ownership in Canada becomes slightly more affordable in Q3 2014: RBC Economics

 

Price drops in Saskatchewan generated some of the larger improvements in affordability among local and provincial markets; Quebec’s condo segment also seeing increased affordability

 

TORONTO, November 26, 2014 -  Home ownership became more affordable across Canada in the third quarter of 2014 despite a broad increase in home prices, according to the latest Housing Trends and Affordability report issued by RBC Economics Research.

“Owning a home was a bit easier in Q3 thanks to rising household incomes, low and steady interest rates and cheaper utility costs in many parts of the country – Toronto even saw some relief,” said Craig Wright, senior vice president and chief economist, RBC. “With home resales sitting close to the highest levels since early 2010, the overall tone of Canada’s housing market is quite solid at this stage.”

RBC notes that resales across Canada increased for the eighth time in the past nine months in October, which is primarily reflective of robust activity in a trio of hot markets – namely Calgary, Toronto and Vancouver – where strong demand for homes outstrips supply. This contrasts with balanced or soft conditions that continue elsewhere in the country despite signs of strengthening activity in Q3. RBC says that this split resale picture shows up in price trends as well – prices in Calgary, Toronto and Vancouver have been appreciating much faster than in other local markets.

The report indicates that declines in fixed mortgage rates earlier this year were a key reason there was such strength in the housing market since spring. RBC anticipates interest rates to have a dampening effect on the market in 2015 with expectations that the Bank of Canada will raise its overnight rate mid-year and longer-term rates will rise well before that.

“A combination of gradually increasing interest rates and higher prices will likely reverse the improvement in housing affordability that took place in the past year and weigh more and more heavily on homebuyer demand in Canada,” said Wright. “We expect the next stage of the housing cycle to be a transition toward lower resales and slower price increases.”

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 decline in the measure represents an improvement in affordability).

During the third quarter of 2014, affordability measures at the national level fell by 0.2 percentage points to 47.8 per cent for two-storey homes and by 0.3 percentage points to 27.1 per cent for condo apartments. The measure for detached bungalows inched higher by 0.1 percentage points to 42.6 per cent.

“A trend that jumped out in the latest data was a further broad improvement in affordability of condos where a strong majority of markets across Canada saw the measure for the segment fall,” said Wright. “Condos no doubt continue to be the more affordable ownership option in every market.”

RBC’s housing affordability measure for the benchmark detached bungalow in Canada’s largest cities in the third quarter of 2014 is as follows: Vancouver 83.6 (up 1.6 percentage points from the previous quarter); Toronto 56.3 (up 0.3 percentage points); Montreal 37.0 (down 0.3 percentage points); Ottawa 35.7 (down 0.3 percentage points); Calgary 34.2 (up 0.6 percentage points); Edmonton 31.9 (up 0.2 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 under pressure

  • Housing affordability in the province came under pressure in the third quarter, with RBC measures rising for all housing categories between 0.2 percentage points and 1.0 percentage points. Affordability continues to compare poorly against historical norms in the province and the measures elsewhere in the country, largely reflecting extreme conditions in Vancouver.

Alberta: affordability remains relatively attractive

  • As a share of household income, ownership costs are fairly low in Alberta – compared to both long-term and national averages. RBC’s third quarter measures for the province climbed by 0.4 percentage points for both bungalows and two-storey homes. The measure for condos eased by 0.2 percentage point, and stands at the lowest level among the provinces.

Saskatchewan: prices decline and affordability improves

  • Price declines in the province contributed to a significant improvement in affordability in Q3, especially for bungalows. RBC’s measures fell 1.3 percentage points for bungalows (the largest decline in the country), and by 0.4 percentage points for both two-storey homes and condos.

Manitoba: housing largely becomes more affordable

  • Affordability conditions largely improved in Q3 in the province, much as it has been the case since the middle of 2013. RBC’s measures for bungalows and condos fell by 0.4 percentage points and 0.2 percentage points, respectively. The measure for two-storey homes rose by 0.2 percentage points.

Ontario: affordability remains moderately strained

  • Homebuyers in the province benefited from some modest improvement in affordability, though it still remains relatively strained – mostly in the Toronto area. RBC’s measures edged lower between 0.1 percentage points and 0.4 percentage points across housing categories.

Quebec: most attractive affordability levels in years

  • Housing affordability continued to improve for the most part in the province, reaching the most attractive levels in years. In Q3, RBC’s measures eased by 0.8 percentage points for condos and 0.4 percentage points for two-storey homes. The measure for bungalows remained unchanged.

Atlantic Canada: affordability conditions remain generally favourable

  • Homebuyers in the region are benefitting from generally favourable affordability conditions. RBC’s measure for bungalows eased by 0.3 percentage points and edged slightly higher by 0.1 percentage points and 0.2 percentage points for two-storey homes and condos, respectively. Measures for the region remain among the lowest in the country.

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