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Canada's housing affordability slips overall, masking diverging local conditions in Q4 2014: RBC Economics


Strong home price increases in Ontario biggest factor in erosion

TORONTO, March 3, 2015 -  Solid home price increases in Ontario were key to the slight erosion in housing affordability across Canada in Q4 of 2014, according to the latest Housing Trends and Affordability Report issued by RBC Economics Research.

RBC says that although owning a home at current market value in Canada became slightly less affordable for the second straight quarter in Q4, affordability trends have stayed relatively flat since 2010. Meaning, ownership costs represented no more of a burden at the end of 2014 than in 2010 for a typical household. Still, one major local market had a far reaching impact in the latest period, pulling down affordability data nationally.

“We are watching Toronto pretty closely as it’s a market that time and time again shows deteriorating affordability – indicating that owning a home in the area, especially a single detached, is a stretch for many local homebuyers,” said Craig Wright, senior vice-president and chief economist, RBC. “While we’ve seen some improvements over the past couple of years, Vancouver still takes the top spot for the least affordable market in Canada.”

The report notes that after showing surprising strength since the spring last year, resale activity experienced the steepest monthly decline in four and a half years at the end of 2014, with the number of homes changing hands falling between 5.6 per cent between November and December. January 2015 brought more of the same with resales falling another 3.1 per cent. RBC indicates that this new bout of weakness can be largely attributed to the sharp drop in oil prices, which damaged confidence in oil-producing provinces.

“Calgary became a buyers’ market in the fourth quarter following a prolonged period of nearly three years when sellers had the upper hand,” said Wright. “Demand-supply conditions in most other local markets remained generally balanced with the exception of Vancouver, which stood out as a sellers’ market.”

In mid-January the Bank of Canada cut its overnight rate to 0.75 per cent, triggering reductions in both fixed and variable mortgage rates. RBC says that these reductions are likely to help improve housing affordability in the near term.

“With limited upward pressure on prices in most local markets, lower interest rates should have a positive effect on affordability,” added Wright. “By 2016 however, we expect the BoC will reverse course and begin to normalize monetary policy – any rise in interest rates would threaten to erode affordability conditions and weigh on homebuyer demand in Canada.”

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 (an increase in the measure represents deterioration in affordability).

During the final quarter of 2014, affordability measures at the national level edged higher by 0.1 percentage points to 42.7 per cent for bungalows and 0.2 percentage points to 48.1 per cent for two-storey homes. The measure for condominiums remained unchanged at 27.4 per cent. RBC’s measures remain close to historical averages in most markets across the country.

RBC’s housing affordability measure for the benchmark detached bungalow in Canada’s largest cities in Q4 of 2014 is as follows: Vancouver 82.4 (down 1.2 percentage points from Q3); Toronto 56.8 (up 0.8 percentage points); Montreal 37.3 (unchanged); Ottawa 36.0 (up 0.2 percentage points); Calgary 33.7 (down 0.6 percentage points); Edmonton 33.5 (up 0.1 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: Small improvement in affordability conditions

  • Housing affordability slightly improved across all categories of homes measured by RBC, primarily reflecting stronger household income arising from brighter economic prospects in the province. During Q4, RBC’s measures eased between 0.1 and 0.7 percentage points.

Alberta: Housing remains relatively affordable despite buffeted economic confidence

  • Housing affordability was mainly unchanged in Alberta during Q4, continuing to be fairly attractive relative to other provinces and compared to historical averages. RBC’s measure for bungalows fell by 0.4 percentage points, and remained unchanged for both condos and two-storey homes.

Saskatchewan: Price declines translate to improved affordability

  • Price declines in the province during the fourth quarter of 2014 contributed to the fifth consecutive quarter of affordability improvements. RBC’s measures fell by 0.6 percentage points for both bungalows and two-storey homes. The measure for condos, however, rose by 0.6 percentage points.

Manitoba: Affordability improves across the provincial housing market

  • It became more affordable to buy a home in Manitoba during the fourth quarter of 2014 with RBC’s measures falling across all housing categories (between 0.1 and 0.4 percentage points over the third quarter).

Ontario: Robust housing market conditions impact affordability

  • Ontario’s housing market bucked the generally improving trend in affordability across Canada in Q4, 2014. RBC’s measures rose in all categories between 0.2 percentage points and 1.0 percentage points.

Quebec: Broad-based improvements in affordability continue

  • Steady improvements in Quebec’s housing affordability continued in the fourth quarter of 2014 with RBC’s measure declining across all categories tracked. Measures fell by 0.6 percentage points for two-storey homes and by 0.4 percentage points for both bungalows and condos.

Atlantic Canada: Among the most affordable markets in Canada

  • The region’s homebuyers continued to face some of the most affordable conditions across the country in Q4 of 2014. RBC’s affordability measures fell for both the two-storey and bungalow segments, by 0.5 and 0.1 percentage points, respectively. The measure for the condo segment edged higher by 0.1 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