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Housing affordability sharply deteriorates across Canada, says RBC Economics


Homeownership costs continued to climb steadily with Canada’s housing affordability sharply eroding across all four housing types in the second quarter, according to the latest Housing Affordability report released today by RBC Economics.

“In the second quarter, Canada’s housing affordability experienced one of the largest and most broadly based quarterly deteriorations since the mid-1990s,” said Derek Holt, assistant chief economist, RBC. “Higher house prices, mortgage rates, utilities and property taxes all combined to drive the country-wide deterioration.”

The RBC Affordability report measures the proportion of pre-tax household income needed to service the costs of owning a home. All four housing classes eroded -- the standard condo remained the most affordable during the quarter, requiring about 29 per cent of income. A standard townhouse was next at 33 per cent, followed by a detached bungalow at 41 per cent. A standard two-storey home remained the least affordable housing type at 46 per cent.

According to RBC, the effects were extensive as affordability eroded in every single housing class, in every province and in every major city across Canada. RBC notes that Saskatchewan, Alberta and British Columbia witnessed the most significant erosion in housing affordability. Affordability deteriorated by approximately 20 per cent across each of the home segments in Saskatchewan, marking the worst quarterly deterioration on record. Over the past couple of years, Saskatoon, Edmonton and Calgary have suffered the largest deteriorations of all Canadian cities. Housing market conditions from Manitoba eastward are relatively stable compared to the western provinces.

Holt noted that the arrival of extended amortization mortgages has changed the dynamics of the housing market. The new found ability to extend amortization up to forty-year mortgages temporarily offsets affordability pressures by rolling the clock back to late 2005 and early 2006 affordability conditions.

RBC’s Affordability measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 71 per cent, Toronto 45 per cent, Calgary 45 per cent, Montreal 36 per cent and Ottawa 31 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: Housing affordability eroded further across the province as rising mortgage rates and house prices squeezed out prospective home-buyers. The relief seen in the two-storey home segment earlier this year was reversed this quarter with all four home segments witnessing deteriorations in affordability.

Alberta: Housing affordability deteriorated significantly in the second quarter of 2007. Alberta’s house prices have been growing at a pace well above incomes and in a short time have created stressed affordability conditions.

Saskatchewan: The Saskatchewan housing market suffered its worst ever quarterly deterioration of affordability on record. At the start of the year, the influx of people caught the housing supply off guard, forcing affordability to deteriorate. This momentum continued into the second quarter as the pace of annual price gains soared into the double digit range.

Manitoba: With house price gains picking up pace and mortgage rates continuing to rise, the province’s housing affordability has deteriorated for a second straight quarter. Manitoba saw the greatest quarterly decline in affordability in more than a year.

Ontario: After modest improvements earlier in the year, Ontario’s housing affordability deteriorated sharply in the second quarter. A combination of higher house prices, rising mortgage rates and increasing utility costs have forced a substantial deterioration in affordability across all housing classes.

Quebec: Despite only modest increases in house prices this past quarter, climbing mortgage rates, utilities and taxes drove an erosion in Quebec’s housing affordability. However, the province’s decent economic fundamentals still support housing markets, with job growth at a healthy two per cent rate this year and incomes keeping pace with gains in house prices.

Atlantic region: An environment of rising mortgage rates and strong price gains created pricier second quarter housing conditions in Atlantic Canada. While each of the housing segments witnessed a significant affordability deterioration, it was the two-storey and condo segments that saw the sharpest erosion.


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