Housing in Canada became slightly less affordable in the second quarter of 2012, according to the latest Housing Trends and Affordability Report released by RBC Economics Research.
“Market conditions remained fairly balanced across the country in the second quarter, laying the groundwork for further price increases, which in turn contributed to a decrease in affordability,” said Craig Wright, senior vice president and chief economist at RBC. “Going forward, we anticipate that the latest mortgage insurance rule changes and prospects for further erosion in affordability will restrain homebuyer demand in Canada.”
Exceptionally low interest rates have been the most important factor in keeping affordability from reaching dangerous levels in recent years, RBC notes. Affordability-related pressures, therefore, could well intensify next year, should interest rates begin to rise.
“Assuming the European crisis remains contained and fiscal challenges in the U.S. are addressed, we expect the Bank of Canada to start normalizing interest rates early next year. This could cause further deterioration in affordability,” explained Wright. “We think that the central bank will proceed gradually with rate increases and that household income will continue to grow. Both of these factors should lessen the negative impact on the housing market.”
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. During the second quarter of 2012, measures at the national level edged higher for detached bungalows and two-storey homes by 0.2 and 0.6 percentage points to 43.4% and 49.4%, respectively (an increase in the measure represents deterioration in affordability). The measure for condominium apartments was unchanged at 28.8%.
Over the past two quarters, erosion in the single family home categories pushed the level of these measures further above their long-term averages in Canada. However, national figures are somewhat exaggerated by extremely poor affordability in the Vancouver area.
“The degree to which the most recent levels exceed historical averages is smaller if Vancouver is excluded from the calculations, especially in the case of detached bungalows, while the measure for two-storey homes is somewhat elevated in comparison to the long-run average,” added Wright. “This likely signifies that some affordability-related stress is building in this category across Canada. On the other hand, any such stress appears to be minimal at most for condominium apartments.”
Across Canada, housing affordability varies significantly. Of the largest cities, Vancouver is by far the least affordable place to own a home, with a measure of 91%, up 2.2 percentage points from the previous quarter. Other major cities recorded lower scores, including: Toronto, with 54.5% (up 0.9 percentage points); Ottawa, with 41.9% (unchanged); Montreal, with 40.4% (down 1.0 percentage points); Calgary, with 36.7% (unchanged); and Edmonton, with 32.4% (down 0.1 percentage points).