Canada's Housing Affordability continues to
exert mild stress on potential homebuyers: RBC Economics
TORONTO, May 23, 2013 Canada's housing
market remained under moderate affordability-related stress
in the first quarter of 2013, as housing affordability stayed
in the holding pattern that began in early 2010, according
to the latest Housing
Trends and Affordability Report issued by RBC Economics
Research. Housing affordability was largely unchanged in the
latest period, as it was largely the status quo for mortgage
rates, home prices and household incomes.
"The Canadian housing market cooled significantly in
the past year; however, there is mounting evidence that activity
is no longer weakening," said Craig Wright, senior vice-president
and chief economist, RBC. "A significant nation-wide
price correction does not appear to be imminent so long as
affordability remains outside of the danger zone."
The RBC housing affordability measure captures the proportion
of pre-tax household income that would be needed to service
the costs of owning a specified category of home at going
market values (a rise in the measure represents deterioration
During past housing market downturns in Canada, RBC estimates
that the measure for the benchmark detached bungalow most
often climbed above the 44.5 per cent mark before prices fell
more than 5.0 per cent (peak to trough). At 42.5 per cent
(up by 0.3 percentage points) in the first quarter of this
year, the bungalow measure remained below this critical threshold.
During the first quarter of 2013, measures at the national
level were unchanged in the two other categories of homes
tracked. RBC measures for the standard two-storey home and
condominium apartment categories remained at 48.0 per cent
and 28.1 per cent, respectively.
Exceptionally low mortgage rates have been the chief factor
in keeping homeownership costs relatively affordable, RBC
"While affordability levels are manageable at this point,
we'd be humming a very different tune if interest rates were
to suddenly rise substantially. Fortunately, the likelihood
of a surge in rates is slim at this stage," said Wright.
"We believe that the more probable scenario in Canada
is one of low interest rates over the next two years; we expect
the Bank of Canada to begin gradually raising the overnight
rate in mid-2014."
RBC notes that when interest rates eventually rise, it will
be because the Canadian economy is on stronger footing. Part
and parcel of this stronger economic environment will be heftier
household income gains, which would work to offset any negative
impact on affordability.
The housing market is clearly cooler than it was just a year
ago; home resales were down 13 per cent nationally in the
first quarter of this year relative to the same period in
2012. RBC notes that much of the decline took place in the
months following the latest changes to government-insured
mortgage insurance rules implemented in July. Activity appears
to have stabilized since then - first-quarter resales were
unchanged from the fourth quarter of 2012.
Home prices in Canada gave up some ground after a peak in
June of 2012, but have generally held up so far in 2013, thanks
to predominantly balanced markets in Canada. RBC says that
in the past year as demand cooled, the supply of homes for
sale also curbed, helping to maintain balanced conditions.
RBC expects market activity to remain subdued this year.
However, as the negative effects of the mortgage insurance
rule changes gradually dissipate, there could be a mild strengthening
from recent monthly levels.
In Canada's local markets, there were some divergences in
affordability trends in the first quarter of 2013, but, in
most cases, changes were minimal. Vancouver continues to be
the least affordable market in the country by far. RBC notes
that, to a lesser extent, Toronto and Montreal are other city
markets showing signs that homeownership is a bit of a stretch
for a typical household budget - particularly in the single-family
home segments. Other local markets tracked by RBC stand within
historically safe ranges.
RBC's housing affordability measure for the benchmark detached
bungalow in Canada's largest cities is as follows: Vancouver
82.3 per cent (up 0.1 percentage points from the previous
quarter); Toronto 53.8 per cent (up 0.8 percentage points);
Montreal 40.1 per cent (up 0.6 percentage points); Ottawa
39.1 per cent (up 0.1 percentage points); Calgary 38.7 per
cent (up 0.8 percentage points); Edmonton 30.4 per cent (down
0.2 percentage points).
The RBC Housing Affordability Measure, which has been compiled
since 1985, is based on the costs of owning a detached bungalow
(a reasonable property benchmark for the housing market in
Canada) at market value. Alternative housing types are also
presented, including a standard two-storey home and a standard
condominium apartment. The higher the reading, the more difficult
it is to afford a home at market values. For example, an affordability
reading of 50 per cent means that homeownership costs, including
mortgage payments, utilities and property taxes, would take
up 50 per cent of a typical household's monthly pre-tax income.
Highlights from across Canada:
Columbia: affordability improves, but still has
a long way to go
Homeownership in the province became slightly more affordable
in the first quarter, though the market has a long way to
go before homebuyers can experience more normal levels by
historical standards. RBC measures fell by 0.4 percentage
points for bungalows and by 1.3 percentage points for two-storey
homes. The measure for condominiums remained unchanged.
slight erosion in affordability does little to deter
High household incomes in the province kept homebuyers unfazed
by the slight erosion in affordability in the first quarter.
Alberta's housing market remains a bright spot in Canada
despite the fact that affordability measures rose slightly
by 0.2 percentage points across all housing types tracked
biggest affordability improvement in Canada
Following a noticeable deterioration in the fourth quarter
of 2012, Saskatchewan's affordability levels registered
the largest improvement across Canada in kicking-off 2013.
RBC measures fell by 1.7 percentage points for two-storey
homes, 1.0 percentage point for bungalows and 0.3 percentage
points for condominiums.
second consecutive quarter of affordability deterioration
Manitoba's affordability levels deteriorated for the second
straight quarter in the first quarter of 2013, though levels
are still not considered dangerous for provincial homebuyers.
The RBC measures rose modestly across all housing categories
- up 0.8 percentage points for bungalows, 0.4 percentage
points for condominiums and 0.2 percentage points for two-storey
affordability conditions extend their recent trends
Ontario's affordability conditions in the first quarter
of 2013 were by and large an extension of recent trends
- a deterioration in the single family homes categories
and a standstill for the condominium category. RBC's measures
for both bungalows and two-storey homes rose by 0.4 percentage
points, while the measure for condominiums remained unchanged.
affordability variations a mixed bag
Affordability levels in Quebec remain modestly worse than
they have been historically for single family homes, which
could be contributing to homebuyers' hesitation in pulling
the trigger on purchases over the past year. In the first
quarter of 2013, RBC measures were a mixed bag, with bungalows
and two-storey homes rising 0.4 percentage points and 0.1
percentage points, respectively, and condominiums declining
0.6 percentage points.
Canada: cooling housing market keeps affordability
Increasingly looser housing market conditions have reduced
sellers' pricing power, keeping affordability fairly attractive
in Atlantic Canada. First quarter measures rose very modestly,
between 0.4 and 0.6 percentage points, for all categories
tracked by RBC.
The full RBC Housing Trends and Affordability report is available
online, as of 8 a.m. ET today, at rbc.com/economics/market/.
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For more information, please contact:
Wright, Senior Vice-President and Chief Economist,
RBC, 416 974-7457
Hogue, Senior Economist, RBC Economics Research,
Lalonde, Manager, Corporate Communications,
RBC Capital Markets, 416 842-5635