Homeownership slipping away from more Canadians

A stronger housing market and increasing mortgage rates mean housing was less affordable in Q3, RBC Economics’ latest housing trends and affordability report shows.

Still, lack of affordability has yet to threaten the housing market’s overall health and stability, RBC says.

In Q3, more resale activity pushed national home prices up, while bond yields also rose, says Craig Wright, senior vice-president and chief economist, RBC.

“These factors translated into the first notable increase in mortgage rates in Canada this summer since the second quarter of 2011 and, ultimately, contributed to a slip in affordability,” he says

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The RBC housing affordability measure looks at 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. A rise in the measure represents deterioration in affordability.

During Q3, affordability measures at the national level rose modestly across all three categories of homes tracked. Detached bungalows rose 0.7 percentage points to 43.3%, while the measure for two-storey homes climbed 0.6 percentage points to 48.9%. The measure for standard condominiums edged only slightly higher by 0.1 percentage points to 28%.

Prices for bungalows and two-storey homes continued to outpace those of condos in the third quarter, in turn driving up ownership costs for single-family homes to near-record levels relative to condominiums.

“The difference between measures for two-storey homes and condos at the national level was the second-widest registered since the mid-80s,” said Wright.

This largely reflects the strong demand for single-family homes relative to a more limited supply in desirable locations across Toronto, Montreal and Vancouver. Single-family homes have become more of a luxury in these markets, which proportionally fewer households can afford. RBC notes that in other markets across the country, affordability is generally in line with historical norms for all housing categories.

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The biggest risk to maintaining affordability in Canada is a sharp rise in interest rates, which RBC says is unlikely at this point. RBC Economics forecasts that the Bank of Canada will leave its overnight rate unchanged in 2014. Bond yields – the main driver of fixed mortgage rates – are projected to drift gently upward throughout the year ahead of what is likely to be a gradual pace of policy tightening by both the U.S. and Canadian central banks, RBC says.

RBC’s housing affordability measure for the benchmark detached bungalow in Canada’s largest cities is as follows: Vancouver 84.2 (up 2.0 percentage points from the previous quarter); Toronto 55.6 (up 1.3 percentage points); Montreal 38.3 (up 0.3 percentage points); Ottawa 37.3 (up 0.4 percentage points); Calgary 33.7 (up 0.7 percentage points); Edmonton 32.9 (up 0.5 percentage points).

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Staff

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