Canadian housing more affordable: RBC

Canada’s housing market became more affordable in the third quarter of 2012 as a result of modest declines in home prices and further gains in household incomes, finds RBC Economics Research.

“The broad affordability picture has been somewhat stationary over the last two years, alternating between periods of improvement and deterioration, resulting in an affordability trend that is, on net, essentially flat,” says Craig Wright senior vice-president and chief economist, RBC.

RBC notes Canada’s housing market cooled further in the third quarter, due in part to a fourth round of changes to government-backed mortgage insurance, which raised the bar for first-time buyers. RBC expects the effects from these modifications to ease by the end of the year and resale activity to stabilize in 2013.

Read: Canadian housing continues cooling

Exceptionally low interest rates have been the key factor in keeping affordability levels from reaching dangerous heights in Canada in recent years. As interest rates are currently at generational lows, the scope for increases is substantial in the coming years.

“Assuming the European crisis remains somewhat in check, and the U.S. fiscal challenges are addressed, we anticipate the Bank of Canada will begin gradually raising the overnight rate in the second half of next year,” adds Wright. “This, along with the expected continued growth in household income, will lessen the risk of marked erosion in affordability.”

Read: U.S. housing surge will help 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 going market values. RBC’s measure for the benchmark detached bungalow edged lower by 1.0 percentage point to 42%, while the two-storey homes category fell by 1.2 percentage points to 47.8%; the measure for condominium apartments eased by 0.6 percentage points to 28%.

In spite of this improvement, RBC measures continue to modestly exceed their long-term averages, though national figures are somewhat inflated by extremely poor affordability in the Vancouver-area market.

Read: Best bets in Canadian real estate

“The cost of owning a home took a smaller bite out of household pocketbooks in the third quarter as home prices fell—most notably in the Vancouver area, though it remains the least affordable market in Canada by a wide margin,” explains Wright.

RBC’s housing affordability measure for the benchmark detached bungalow in Canada’s largest cities is as follows: Vancouver 83.2% (down 5.8 percentage points from the previous quarter); Toronto 52.4% (down 0.7 percentage points); Montreal 40.2% (up 0.1 percentage points); Ottawa 38.7% (down 0.4 percentage points); Calgary 38.3% (down 0.7 percentage points) and Edmonton 31.1% (down 0.6 percentage points).

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