Housing affordability improves: RBC

“After two consecutive quarters of deterioration, Canada’s housing affordability has improved modestly in the third quarter, according to the latest Housing Trends and Affordability Report released today by RBC Economics.

Elevated uncertainty relating to the European sovereign-debt crisis and the downside risk for economic growth have contributed to keeping interest rates at low levels,” said Craig Wright, senior vice-president and chief economist, RBC. “The lower interest rate environment – which also includes mortgage rates – has played a part in slightly reducing the costs of owning a home in Canada in the third quarter.”

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. During the third quarter of 2011, measures for the national level fell for all housing categories tracked by RBC (a fall represents an increase in affordability).

Earlier this year, deterioration in affordability at the national level was skewed by substantial increases in homeownership costs in Metro Vancouver. In the third quarter, RBC measures in the majority of provinces and cities experienced modest declines (less than 1 percentage point). More remarkable improvements materialized in a few local markets across Canada, including Montreal (for two-storey homes and detached bungalows), Manitoba (for two-storey homes), and Vancouver (for detached bungalows).

“Housing affordability levels are quite good in most parts of Canada and will pose little threat to overall housing demand,” added Wright. “The Vancouver area market continues to be a major exception, with sky-high property values in upscale neighbourhoods making it both extremely unaffordable and the most at risk of a downward correction.”

Going forward, RBC forecasts that interest rates will remain exceptionally low in Canada until mid-2012 and rise gradually after that.

“We expect to see further slowing in the pace of home price increases next year, as housing demand levels out,” said Wright. “These factors will set the stage for a period of relative stability in affordability trends in Canada.”

The RBC report indicates that the cost of owning a home at market value remains close to historical norms in the majority of markets outside of British Columbia, implying that local markets are, for the most part, at worst, slightly ‘unaffordable’. Affordability tensions emerged earlier this year in Toronto, Ottawa and Montreal (particularly in two-storey homes) and continue to be in a slightly uncomfortable range.

RBC’s housing affordability measure for the benchmark detached bungalow in Canada’s largest cities is as follows: Vancouver 90.6 per cent (down 1.5 percentage points from the previous quarter), Toronto 52.1 per cent (up 0.1 percentage points), Montreal 40.9 per cent (down 1.3 percentage points), Ottawa 40.8 per cent (down 0.6 percentage points), Calgary 37.6 per cent (up 0.5 percentage points) and Edmonton 33.2 per cent (down 0.6 percentage points).