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Housing affordability rift widened across Canadian markets in Q2 2015: RBC Economics


  • Stretched affordability conditions continued to deteriorate in Toronto and Vancouver, while the rest of the country remained stable at fairly neutral levels
  • Home resales in Canada poised for one of their strongest years on record in 2015

TORONTO, August 31, 2015 -  With the exception of Toronto and Vancouver, where the bar to own a home at current prices was set to multi-year highs, housing affordability remained fairly stable across Canada in the second quarter of 2015, according to the latest Housing Trends and Affordability Report issued today by RBC Economics Research.

While trends in the national affordability measures have been fairly flat since 2010, RBC reports that Toronto and Vancouver continued to experience strong housing price increases – particularly for single detached homes – in the second quarter, further widening the rift between these two markets and the rest of Canada.

“The Toronto and Vancouver markets really stand out because of their elevated and rapidly rising prices, and they are the main factors contributing to further modest erosion in affordability overall in Canada,” said Craig Wright, senior vice-president and chief economist, RBC. “Outside of Toronto and Vancouver, affordability levels are close to, or slightly better than, long-term averages, which suggests that housing affordability remains fairly neutral in most of Canada with limited signs of undue stress being exerted on homebuyers.”

Contrasting regional affordability trends are expected to continue in the near term. RBC says that affordability is likely to deteriorate further in Toronto and Vancouver in the period ahead due to upward price pressure being sustained by tight demand-supply conditions. As for the rest of the country, generally balanced supply demand conditions point to comparatively slower-rising home prices and steadier affordability.

“A significant rise in interest rates could change this two-tiered picture by negatively affecting affordability across all regions in Canada, and this could pose a risk for the entire housing market,” Wright added. “However, we expect policy interest rates to remain low in the coming year. This suggests that any near-term risk would stem from weakness in the labour market which has fortunately been holding up well to date.”

Canada’s housing market on track for one of its best years on record
Despite the plunge in oil prices hitting Canada’s economy negatively and a spike in condominium completions, RBC anticipates that Canada’s housing market will post one of its best years on record in 2015. RBC expects home resales across the country to rise by 5.0 per cent to 505,400 units, thanks in large part to solid gains in British Colombia, Ontario and to a lesser extent, Quebec. Historically low interest rates continue to provide substantial stimulus for housing demand at this point in time.

RBC projects home prices to rise by 4.6 per cent in Canada in 2015, nearly unchanged from a rate of 4.8 per cent recorded in 2014. RBC’s measures are still quite close to their long-term averages, suggesting that current conditions are within historical norms.

The RBC Housing Affordability measure captures the proportion of pre-tax household income that would be needed to service the cost of owning a specific category of home at current market value (an increase in the measure represents a deterioration in affordability). During Q2 2015, national affordability measures rose by 0.7 percentage points to 43.3 per cent for bungalows and by 0.4 percentage points to 48.3 per cent for two-storey homes. The measure for condominiums remained unchanged at 27.1 per cent.

RBC’s housing affordability measure for the benchmark detached bungalow in Canada’s largest cities in Q2 2015 is as follows: Vancouver 88.6 (up 3.0 percentage points from Q1 2015); Toronto 59.4 (up 2.1 percentage points); Montreal 36.0 (down 1.2 percentage points); Ottawa 35.4 (unchanged); Calgary 32.4 (down 0.4 percentage points); Edmonton 32.5 (down 0.4 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 home ownership 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 that would be associated if an average household were to buy a home at present market values and interest rates. It is not an observation of the costs actually 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: Vancouver skews provincial affordability

  • Rapid home price increases in Vancouver significantly impacted housing affordability in British Colombia in the second quarter. RBC’s measures for the province rose more than any other province, up 2.5 percentage points for two-storey homes, 2.1 percentage points for bungalows, and 0.4 percentage points for condominiums.

Alberta: Market settling down with support from affordable conditions

  • Following the plunge in oil prices in the first quarter of 2015, Alberta’s housing market settled down in the second quarter. RBC’s measures for the province fell by 0.5 percentage points for two-storey homes, 0.1 percentage points for bungalows, and inched higher by 0.2 percentage points for condominiums.

Saskatchewan: Signs of market recovery

  • Signs of recovery in the home resale market were apparent in the second quarter, although resale activity remained far below levels in 2014. RBC’s measures increased by 0.8 percentage points for both bungalows and two-storey homes, while the measure for condominiums decreased by 0.2 percentage points.

Manitoba: Affordability was a mixed bag

  • Owning a bungalow or condominium became less affordable in Q2, while owning a two-story home became more affordable. RBC’s measures rose modestly for both bungalows and condominiums at 0.7 percentage points, while the measure for two-storey homes fell by 0.5 percentage points.

Ontario: Affordability picture continues to be split

  • Owning a single-detached home at market prices in the province has become less and less affordable, while owning a condominium appears to be within reach. RBC’s measures showed further deterioration for bungalows (rising by 1.1 percentage points) and two-storey homes (up 0.7 percentage points), while condominiums remain fairly steady (down only 0.1 percentage points).

Quebec: Improving affordability trends persist

  • Housing affordability continued to improve in Quebec in Q2. RBC’s affordability measures fell in all three categories for the third consecutive quarter and by some of the largest margins across all the provinces. Two-storey homes fell by 1.1 percentage points, bungalows fell by 0.9 percentage points, and condominiums decreased by 0.5 percentage points.

Atlantic Canada: Soft demand-supply conditions despite favourable affordability

  • Softness in the housing market drove homeownership costs down in Q2. RBC’s affordability measures fell across all categories (between 0.3 and 0.7 percentage points), adding to the continuous decline registered since late 2013.

The full RBC Housing Trends and Affordability report is available online as of 8:00 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
Romina Mari, Communications, RBC Capital Markets, 416-974-3558