Housing affordability to improve in 2008, says RBC Economics

After homeownership costs climbed steadily through 2007, nationwide housing affordability should to start to improve in 2008, according to the latest Housing Affordability report released today by RBC Economics.

“Almost every house class in every province and major city saw affordability deteriorate last year,” said Derek Holt, assistant chief economist, RBC. “Unlike the late 1980s and early 1990s when both unemployment rates and interest rates pushed into double digits and led to declining affordability, the prime culprit this time around has been a long string of house price gains that have outstripped income gains.”

The RBC Affordability report measures the proportion of pre-tax household income needed to service the costs of owning a home. In the most recent quarter, the affordability of all four housing classes eroded, with the exception of slight improvements in Calgary’s condos and Edmonton’s detached bungalows. Across the country, the standard condo remained the most affordable housing type, requiring about 30 per cent of pre-tax household income. A standard townhouse was next at 34 per cent, followed by a detached bungalow at 42 per cent while a standard two-storey home remained the least affordable housing type at 47 per cent.

According to RBC, new record highs for the amount of household income going towards homeownership costs are being set across most housing classes in British Columbia, Alberta and Saskatchewan. While their provincial economies are strong, the gains have been increasingly leveraged. The Saskatchewan-Manitoba border remains the dividing line between over-heated housing markets in Canada: everything from Manitoba eastward remains well below previous record highs for affordability set in the late 1980s and early 1990s.

Canada’s rate of resale house price appreciation is likely to slow to between five and seven per cent in 2008. New home construction volumes and income growth are also expected to decline. The popular five-year mortgage rate is anticipated to drift about 50 to 75 basis points lower by year-end, and the Bank of Canada’s overnight rate is forecast to drop by a further 100 basis points.
RBC’s Affordability measures for a detached bungalow for Canada’s largest cities are as follows: Vancouver, 72 per cent, Calgary, 46 per cent, Toronto, 46 per cent, Montreal, 37 per cent and Ottawa, 32 per cent.

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.

In addition to major urban centres, the report includes 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.

Highlights from across Canada:

* British Columbia: Housing affordability reached into uncharted territory late last year as affordability deteriorated to its worst level since 1985 when RBC started tracking conditions. Modest improvements are expected for 2008.
* Alberta: Many prospective homebuyers were priced out of the market last year as housing affordability conditions eroded, pushing markets into unsustainable territory. With a softer influx of migrants, the housing market is poised for a significant slowdown and improved affordability.
* Saskatchewan: Housing affordability deteriorated sharply across all home segments last year as a sudden influx of migrants strained existing housing capacity. In 2008, housing affordability conditions are expected to stabilize.
* Manitoba: The province’s housing market is still running at full tilt. Affordability should improve as rising costs start to weigh on demand and help rebalance the market in 2008.
* Ontario: Income growth is expected to cool amidst toughening economic conditions in the province. On balance, our affordability forecast in 2008 points to overall improving conditions as mortgage rates drift lower and price gains moderate even further.
* Quebec: Housing affordability continued to deteriorate last year. Stable and modest price gains combined with some mortgage rate relief this year should translate into an overall improvement in affordability conditions across all four home segments in 2008.
* Atlantic region: Strong house price gains and rising mortgage rates chipped away at affordability conditions in 2007. In 2008, Atlantic Canada is expected to move onto a softer growth trajectory as housing construction activity gears down.