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Housing affordability deteriorates across Canada, says RBC Economics


Canada’s housing affordability eroded across all four housing types in the most recent quarter, according to the latest Housing Affordability report released today by RBC Economics.

“After posting broad-based improvements at the end of 2006, nationwide housing affordability deteriorated in the most recent quarter, with price gains being the main factor,” said Derek Holt, assistant chief economist, RBC. “This erosion occurred despite the strongest gain in median before-tax household incomes in about a year-and-a-half.”

The RBC Affordability report measures the proportion of pre-tax household income needed to service the costs of owning a home. The most affordable housing class remains the standard condo, requiring 27.5 per cent of income. A standard townhouse is next at 31.5 per cent, followed by a detached bungalow at 39 per cent. A standard two-storey home remains the least affordable housing type at 44 per cent.

According to RBC, the positive correlation between sales-to-listings ratios and price gains means that most cities remain in net seller’s territory with sales growth outstripping listings. Some housing markets -- particularly cities in central Canada and B.C., -- where both new listings and sales are tapering off simultaneously are likely to experience a controlled cooling.

While mortgage rates were flat in the first quarter of 2007, the substantial climb in rates in the second quarter is likely to continue with more hikes expected to come as the year unfolds. RBC forecasts short-term, prime-linked borrowing products will rise by a full percentage point by early next year, and with hikes likely starting this summer. Long-term mortgages are likely to rise by about 75 basis points from today’s levels next year. The end result could mean a more significant deterioration in affordability later this year.

Across the country, Alberta, Saskatchewan, Manitoba and Quebec witnessed a broad-based affordability deterioration. Standard two-storey homes in B.C. and the Atlantic region saw a slight improvement, while bungalows in Ontario bucked the nationwide deterioration.

Saskatchewan jumped into the spotlight with the sharpest pace of deterioration, especially in Saskatoon. An influx of migrants, which is at a twenty-five year high, complemented a pick up in wage growth and caught the housing supply off-guard.

RBC’s Affordability measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 68 per cent, Toronto 43 per cent, Calgary 40 per cent, Montreal 35.4 per cent and Ottawa 30.5 per cent.

Also included in the report are housing affordability conditions for a broader sampling of smaller cities across the country. For these smaller cities, RBC has used a narrower measure of housing affordability that only takes mortgage payments relative to incomes into account.

The Housing Affordability measure, which RBC has compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market. Alternative housing types are also presented including a standard two-storey home, a standard townhouse and a standard condo. The higher the reading, the more costly it is to afford a home. For example, an Affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.

Highlights from across Canada:

British Columbia: Solid income gains outstripped softer house price growth to make way for another slight improvement in housing affordability for two-storey homes. The improvement is welcome relief for many prospective homeowners attempting to tap into the already elevated property market. Affordability of the remaining three home segments deteriorated as prices continued to move higher.

Alberta: Economic fundamentals - including strong wages, low unemployment and net provincial migration - are still favouring Alberta’s housing market. However, the frenzied pace of activity exhibited through much of 2006 is starting to moderate.

Saskatchewan: After several years of stability, Saskatchewan’s housing affordability eroded sharply in the first quarter of 2007. Two-storey homes were hit the hardest, as the province’s housing market jumped into a severe state of excess demand. An influx of migrants, which is at a 25 year high, complemented a pick-up in wage growth and caught the housing supply off guard, resulting in soaring prices and a rapid decline in affordability. Caution is warranted because the staying power of this shift in migration is uncertain at this early stage.

Manitoba: Manitoba still remains the most affordable province to own a home in the country, despite the fact that all four housing types saw a decline in affordability. The risk of a market slowdown for Manitoba is much less pronounced, compared to other western provinces.

Ontario: Healthy income gains were offset by modest house price growth, creating very little movement in affordability across all housing classes. Annual house price gains continue to bounce between three-to-five per cent, as Ontario’s housing market continues to level off.

Quebec: Housing affordability modestly deteriorated across all housing segments. However, Quebec’s housing market has had a soft landing as house price gains have leveled off while remaining positive. Despite softer housing markets that are expected to persist through most of 2007, homeowners can still look to retain the equity they have accumulated in their homes.
Atlantic region: Atlantic Canada’s two-storey home segment continued to post improvements in affordability for the first quarter of 2007 while condos, detached bungalows and townhouses witnessed a slight deterioration in affordability.


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