Housing costs rising faster than incomes

Despite the fact home values have dramatically increased your clients’ net worth, they may be feeling a little strapped for cash lately, as the costs associated with home ownership have risen faster than incomes. That’s the conclusion of an RBC Economics study on housing affordability.

“The cost of homeownership in Canada, including financing, utilities and property taxes, rose at a faster pace than incomes for the second consecutive quarter,” said Derek Holt, assistant chief economist, RBC. “While property taxes and utilities increased this past quarter, most of the deterioration in affordability was driven by a surge in home prices and rising mortgage rates.”

The RBC Affordability Index is based on the percentage of pre-tax household income needed to service the costs of owning a home. As interest rates have steadily crept higher, homeowners with adjustable mortgages have seen their payments rise. Meanwhile, inflationary pressures have driven taxes and utilities higher as well.

Among the various classes of housing, condominiums remain the most affordable, consuming just 27.4% of the average owner’s gross income. Townhouses are slightly more expensive, requiring 31% of the owner’s income, while the standard bungalow requires 38.8%.

The real killer, though, is the standard two-storey detached house, with an affordability index reading of 44.5%.

Sales of existing homes now make up a greater portion of the market than in the past, with new homes accounting for just 32% of sales, compared to 42% in the 1980s. The price of new homes has been more stable than existing homes in recent years, but Holt warns that prices in new developments could soon accelerate.

“The continued upward pace of resale prices and mortgage rates into the second quarter of 2006 does not bode well for near-term affordability,” he said in the RBC report.

Not surprisingly, the erosion in affordability has been most pronounced in the hotter real estate markets, as homebuyers require larger mortgages to close their deal. Among the largest cities in Canada, Vancouver is home to the least affordable housing, with a staggering reading of 64.4%. That’s 64.4% of pre-tax income. British Columbia as a whole is the least affordable province.

Toronto is a relative bargain by comparison, where homeowners are shelling out 41.7% of their gross income on their housing costs.

“While Ontario’s housing market continues to see signs of a soft landing, housing affordability declined,” the report states. “Income gains of about $50 per month this quarter were not enough to offset higher mortgage rates and higher utility costs.”

Calgary is more manageable, with an index reading of 32.7%, reflecting the fact that wages are rising much more quickly in Alberta than in other provinces, thanks to the booming oil industry.

In Quebec, sales appear to be slowing, but affordability continued to decline. Housing in Montreal consumes 34.9% of income.

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