Canada’s homes get more expensive

Home price increases in some of Canada’s largest markets further accelerated in the first quarter of 2014, boosting homeownership costs and triggering some erosion in affordability, according to a report by RBC Economics Research.

“Prices for single-family homes in Calgary, Toronto and Vancouver had considerable upward momentum during the first quarter, and led to the strongest annual price gains nationally in nearly two years,” says Craig Wright, senior vice-president and chief economist, RBC. “This stood in the way of any widespread improvement in affordability conditions across Canada.”

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Still, the latest knock to affordability was modest and did not pose any immediate threat to the health of Canada’s housing market, says RBC.

During the first quarter of 2014, affordability measures at the national level rose in two of the three categories of homes. RBC’s measures edged higher by 0.1 percentage points to 43.2% for detached bungalows, and by 0.3 percentage points to 49% for two-storey homes. RBC’s measure for condos, however, fell a modest 0.1 percentage points to 27.9%, indicating that affordability slightly improved for this category of home.

Home resales were generally subdued across the country this past winter, declining 4.8% between Q4 2013 and Q1 2014. The bank expects this softness to reverse when better weather returns in the coming months. April data has already hinted at signs of a pick up – home resales were up 2.7% month-over-month – the biggest gain since August of last year.

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“We expect the rest of the spring season to offer a pick-up in housing activity, largely owing to fixed mortgage rates that recently eased to historical lows,” says Wright. “This strength will be short-lived, though, as we believe that there is limited pent-up demand in the first place, and that longer-term interest rates will start to rise by the third quarter of this year.”

Home resales are projected to rise a modest 0.8% in 2014 to just over 461,000 units in Canada, standing close to the 10-year average of 467,000 units, according to RBC.

Further, if prices continue to accelerate in key Canadian markets in the near-term, affordability could come under pressure. Potential offsets could come from a further drop in mortgage rates and/or rapid growth in household incomes.

Also, the eventual normalization of monetary policy will lead to substantial increases in interest rates over the medium term, which could be too much for other affordability determinants to counteract.

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“We expect the Bank of Canada to gradually raise the overnight rate starting in the middle of 2015, which will cause bond yields to drift gently upward,” says Wright. “This should mitigate the risk that higher rates will unhinge affordability levels.”

Canadian highlights include:

• Housing affordability continues to be poor in B.C. Data measures rose 1.2 percentage points for two-storey homes and 0.9 percentage points for bungalows to 74.2% and 68.4%, respectively. The measure for condos remained unchanged at 33.6%.

• The Alberta housing market continues to be among the stronger in Canada, supported by a booming economy, rapidly rising population and attractive affordability. The measure rose a slight 0.1 percentage points to 32.6% for bungalows and 0.4 percentage points to 20.2% for condominiums. The measure for two-storey homes was unchanged at 34.4%.

• Owning a home in Saskatchewan became slightly more affordable. RBC’s measures fell in two of the three categories – bungalows by 0.6 percentage points to 36.4% and condominiums by 0.1 percentage points to 25.4%. The rise in the measure for two-storey homes – 0.5 percentage points to 40.7% – reversed a decline that took place in the previous quarter.

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• Manitoba homebuyers benefited from some improvement in affordability in the first quarter of 2014. RBC measures for both bungalows and condominiums fell in the first quarter to their lowest levels in nearly a year – by 0.4 percentage points and 0.6 percentage points, respectively. Although the measure for two-storey homes rose by 0.3 percentage points, it stands at a lower level than last spring.

• First quarter affordability measures point to a consistently eroding affordability picture in the province, particularly for single-family homes in Ontario. RBC’s measures stood at 24-year highs for bungalows at 44.9% and two-storey homes at 51.0%. The measure for condominiums was 29.4% – not much below its multi-decade peak.

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• Quebec’s housing affordability in the province did not erode much or at all in the first quarter and largely remain close to historical norms. RBC’s measures edged higher by 0.2 percentage points for bungalows to 34.5% and 0.1 percentage points for two-storey homes to 43.7%. The measure for condominiums fell 0.1 percentage points to 26.6%.

• Atlantic Canada’s housing affordability conditions largely improved in the first quarter, but did little to pull the market out of its slump. RBC measures declined 0.4 percentage points to 31.2% for bungalows and 0.4 percentage points to 25.9% for condominiums. The measure for two-storey homes rose by 0.2 percentage points to 36.2, but remained below its long-term average.