Housing affordability slips

(August 18, 2004) It’s getting harder to afford a home in most provinces, as a strong housing market and higher mortgage rates counteract increased construction, according to a report from RBC Economics.

“Affordability will continue to erode over the balance of this year and next, principally due to relatively mild increases in mortgage rates,” said Carl Gomez, RBC economist. “But this will be tempered by softer price increases, and improving income growth. These factors will help to keep Canada’s housing markets on a solid footing as it comes off its peak.”

The RBC Affordability Index measures the proportion of pre-tax household income needed to service the costs of owning a home. In the second quarter of 2004, the index rose to 31.7% from 30.1% in the first quarter of the year.

Across the country, the extreme ends of the housing cost spectrum are seen on the opposite coasts, with the average for Atlantic Canada marking a low of $955 a month, while in British Columbia, home-ownership costs an average of $1,735 a month. The nationwide average is currently 6.9% higher than in the first quarter, at $1,332.

Higher housing costs can be offset by differences in a province’s average earnings, but this was not the case for B.C., which was not only the most expensive, but ate the largest proportion of earnings as well, at 43.1%. B.C. also saw the greatest quarter-to-quarter change, rising by 2.8%.

Alberta and Atlantic Canada are the most affordable, scoring 26.7% each. The smallest change in affordability was seen in the Maritimes, where the index score increased by just 0.9%. The country’s largest housing market, Ontario, saw an increase of 1.5% to 30.5%.

The bank’s report points out that part of the change in affordability is due to a slight dip in mortgage rates in the first quarter, before they rose again in the second. The average listed five-year closed mortgage rate was 6.45% in the second quarter.

“Housing sales in the third quarter of 2004, while still at historically high levels, could fall by as much as ten per cent, reflecting the second quarter erosion in affordability,” said Gomez.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com