Source: The Canadian Press

The cost of owning a home in Canada continued to climb in the second quarter, but homeowners may soon experience some temporary relief as house prices and some mortgage rates subside, according to a report released Monday.

The RBC Economics Research report found home ownership costs continued to rise in the second quarter of 2010, eroding affordability in most markets.

“The recent decline in mortgage rates and increasing evidence that home prices have started to stabilize in many markets are anticipated to provide some respite from the deteriorating trend in affordability in the near term; however, this is expected to prove temporary,” RBC senior economist Robert Hogue wrote.

In the longer term, RBC said the trend of rising homeownership costs will return as the Bank of Canada continues hiking the key lending rate over the next year and a half, sending variable mortgage rates higher.

The bank compiles an “affordability” index that shows how much pre-tax income is required to pay for three major costs of home ownership: mortgage payments, property taxes and utilities, which vary by location and type of property.

The report issued Monday estimates that for the country as a whole, the cost of home ownership for a detached bungalow increased to 41.2% of pre-tax income in the April-June period, up 2.3 percentage points from the first quarter.

There were wide variations, however, depending on location.

In Toronto and Vancouver, home ownership took an even bigger bite of pretax income — 50.2% and 74%, respectively — while it was lower in Calgary at 39.2% and Edmonton at 34.7%.

However, RBC says there will be some short-term relief from rising household income, a trend toward falling long-term mortgage rates and the expectation that home prices should moderate slightly.

Variable mortgages rates go up and down with the rise and fall of commercial banks’ prime rate, which is closely aligned with the Bank of Canada’s policy. The central bank has raised its policy rate three times this year, and currently stands at 1%, up from 0.25% prior to June 1.

“An expected flattening of home prices and rising household income will partly mitigate the detrimental effect,” Hogue said.

Home prices in the second quarter remained historically high but the number of transactions dropped as much as 25% from the beginning of the year. Prices are beginning to moderate in line with declining demand in the market.

The six-month period starting last October was a period of exceptionally strong housing demand and rising prices in some markets, particularly in British Columbia and Ontario, were boosted by a number of factors, including higher interest rates, a new tax that was pending in those provinces and stricter mortgage qualifications, which took effect in the second quarter.

“While housing demand has cooled considerably since winter, a matching decline in homes available for sale has kept markets in Canada sufficiently tight to allow further modest price increases,” Hogue said.

Despite some greater than usual stress on Canadian homeowners, and the likelihood that costs will rise again when interest rates inevitably peak higher, there is no immediate threat of a U.S.-style collapse, he added.

The report found the costs of owning a home increased the most in Ontario and British Columbia, where consumers are most sensitive to mortgage rate changes because the high property values in those provinces amplify the impact of an increase in monthly mortgage changes.

Those provinces were also slapped with the new harmonized federal-provincial sales tax starting July 1 that now applies to real estate services and others associated with purchasing a home.

The report said home ownership costs in B.C. during the April to June quarter neared the all-time highs reached in 2008.

The RBC housing affordability report measures the proportion of pre-tax household income required to service the costs of mortgage payments, property taxes and utilities.

It found the price of an average two-storey home rose 10% from the same quarter last year to $374,200, taking up about 48.9% of income.