Homeownership costs in Canada increased slightly across all housing segments in the closing months of 2009, and strong demand will continue to push these costs higher, according to the latest housing report by RBC Economics Research.

“While home affordability deteriorated at the national level in the fourth quarter of 2009, the change was relatively modest overall,” said Robert Hogue, senior economist, RBC. “The effect of higher prices was largely mitigated by a small decline in mortgage rates and continued gains in household income.”

The RBC Housing Affordability measure captures the proportion of pre-tax household income needed to service the costs of owning a home. During the fourth quarter of 2009, measures at the national level rose slightly across all housing types (the higher the measure, the more difficult it is to afford a home).

The detached bungalow benchmark inched 0.3% higher to 40.6%, the standard townhouse rose by 0.2 percentage points to 32.9%, the standard condominium climbed by 0.1% up to 28% and the standard two-storey home increased by 0.3 percentage points to 46.7%.

But despite the recent increase, all affordability measures remain well below their levels from a year ago.

The report projects that the cost of owning a home will continue to rise, as strong demand and limited supply of homes for sale sustain the upward trend in prices. Exceptionally low mortgage rates and anticipated rate increases starting mid-year are fuelling demand.

Real estate markets in B.C. and Ontario should see a further boost in demand prior to the introduction of the harmonized sales tax on July 1, 2010, which will increase the transaction costs associated with a home purchase.

According to the report, the federal government’s recent announcement of changes to the mortgage market were aimed at preventing a bubble from forming in Canada and could reduce demand when the new rules take effect in April. However, the precise market effect is unknown at this point.

“The anticipated and gradual rise in interest rates indicates that affordability is likely to gradually get worse as rates return to normal levels,” said Hogue. “The significant drop in mortgage rates since late 2008 was the principal factor contributing to the overall improvement in housing affordability in the past year.”

Residents in Vancouver experienced the largest boost in homeownership costs late last year, with the housing affordability measure for a detached bungalow rising 1.4 percentage points to 69%. In Toronto, the measure rose 0.1 percentage point to 49.1%, and in Montreal it rose 0.9 percentage points to 39.1%.

IE