Housing affordability improves

Declining mortgage rates and home prices are making it cheaper for Canadians to own homes. In fact, the costs of homeownership fell slightly for the second time in a row in Q4 2012, finds RBC Economics Research.

“Residential property values are elevated in Canada and, for many households, ownership remains accessible only because of rock-bottom mortgage rates,” says Craig Wright, senior vice-president and chief economist, RBC. “It could be a different story if interest rates were to move swiftly and significantly higher.”

Read: Housing affordability not a problem for most families But RBC doesn’t expect this to happen, predicting the BoC will leave its overnight rate unchanged at 1% through 2013 and begin a gradual increase in early 2014. And since the economy is expected to be stronger during this time, it’ll offset some of the negative effects that might materialize in the housing market if there’s a rise in rates.

Despite balanced demand and supply conditions in most local markets in Canada, softer homebuyer demand since mid-2012 has weighed on prices, with modest month-to-month declines becoming common occurrences.

Read: Canadian economy is in transition: Tal “We expect overall housing market activity to remain subdued this year,” adds Wright. “That said, we believe there is scope for some mild strengthening from recent activity levels, as the negative effects of the mortgage insurance rule changes, implemented in July 2012 gradually dissipate.”

Both detached bungalows and condominium apartments eased by 0.2 percentage points to 42.1% and 28%, respectively in Q4 2012; the measure for the two-storey home fell by 0.3 percentage points to 47.8%. (Note the higher the reading, the more difficult it is to afford a home. For example, an affordability reading of 50% means homeownership costs, including mortgage payments, utilities and property taxes, would take up 50% of a typical household’s monthly pre-tax income.)

Read: Canadian home sales edge higher

The housing affordability measure for bungalows in Canada’s largest cities is as follows: Vancouver 82.2% (down 2.6 percentage points from the previous quarter); Toronto 52.8% (down 0.4 percentage points); Montreal 39.3% (down 0.9 percentage points); Ottawa 38.8% (down 0.5 percentage points); Calgary 38.1% (up 0.2 percentage points) and Edmonton 30.7% (down 0.1 percentage points).

Provincial highlights

• British Columbia: While affordability still has a long way to go before reaching less stressful levels, homebuyers in the province received a welcome reprieve in the fourth quarter 2012. RBC measures fell by 1.1 percentage points for condominium apartments and 1.0 percentage point for detached bungalows. The two-storey home category experienced a small increase (0.4 percentage points), though this followed a substantial decline in the third quarter.
• Alberta: Brisk housing demand was supported by a strong provincial economy, accelerating population growth and attractive affordability. Further improvement was registered in the fourth quarter with measures falling between 0.1 and 0.2 percentage points.
• Saskatchewan: Tight market conditions at the beginning of 2012 had a lasting impact on home prices, which climbed at some of the faster paces in Canada in the fourth quarter. Rising property values caused affordability to deteriorate in the fourth quarter with measures increasing between 0.5 and 1.1 percentage points.

Read: Prairie cities have best economic growth in 2013

• Manitoba: The market registered a banner year in 2012 with a record 14,000 existing homes sold, indicating affordability levels had little dissuasive effect on homebuyers. Although measures for detached bungalows and condominiums deteriorated in the fourth quarter, measures for two-storey homes remained unchanged. The province measured slightly above its long-term average, suggesting any affordability strain is minimal.
• Ontario: A more balanced market was observed in the second half of 2012, improving overall affordability conditions in the province. RBC’s measures inched lower by 0.1 and 0.3 percentage points for the detached bungalow and condominium apartment, respectively, while the measure for two-storey homes rose marginally by 0.1 percentage points.
• Quebec: Affordability improved for the third quarter in a row, yet this did little to stimulate homebuyer demand as resale activity continued to cool. RBC measures fell for two-storey homes (by 1.1 percentage points) and detached bungalows (by 0.3 percentage points), but rose for condominium apartments (by 0.4 percentage points).
• Atlantic Canada: Affordability received another boost in the fourth quarter, with measures falling for two-storey homes (1.0 percentage points) and detached bungalows (0.5 percentage points), keeping levels well below their respective national averages. The measure for condominium apartments rose modestly by 0.3 percentage points, though this followed a more sizable drop in the previous period.

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