Housing affordability across the country should to start to improve in 2008, according to a 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 at 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 housing 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% of pre-tax household income. A standard townhouse was next at 34%, followed by a detached bungalow at 42% while a standard two-storey home remained the least affordable housing type at 47%.

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%, Calgary, 46%, Toronto, 46%, Montreal, 37% and Ottawa, 32%.