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Canada’s homes become a little less affordable in Q1 2014: RBC Economics

Affordability slips in the majority of local markets

TORONTO, May 27, 2014 –  Home price increases in some of Canada’s largest markets further accelerated in the first quarter of 2014, boosting homeownership costs and triggering some erosion in affordability, according to the latestHousing Trends and Affordability Report issued today by RBC Economics Research.

“Prices for single-family homes in Calgary, Toronto and Vancouver had considerable upward momentum during the first quarter, and led to the strongest annual price gains nationally in nearly two years,” said Craig Wright, senior vice-president and chief economist, RBC. “This stood in the way of any widespread improvement in affordability conditions across Canada.”

Still, the latest knock to affordability was modest and did not pose any immediate threat to the health of Canada’s housing market, says RBC.

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 current market values (an increase in the measure represents deterioration in affordability).

During the first quarter of 2014, affordability measures at the national level rose in two of the three categories of homes tracked by RBC. RBC’s measures edged higher by 0.1 percentage points to 43.2 per cent for detached bungalows, and by 0.3 percentage points to 49.0 per cent for two-storey homes. RBC’s measure for condos, however, fell a modest 0.1 percentage points to 27.9 per cent, indicating that affordability slightly improved for this category of home.

Home resales were generally subdued across the country this past winter, declining 4.8 per cent between Q4 2013 and Q1 2014. RBC expects this softness to reverse when better weather returns in the coming months. April data has already hinted at signs of a pick up – home resales were up 2.7 per cent month-over-month – the biggest gain since August of last year.

“We expect the rest of the spring season to offer a pick-up in housing activity, largely owing to fixed mortgage rates that recently eased to historical lows,” said Wright. “This strength will be short-lived, though, as we believe that there is limited pent-up demand in the first place, and that longer-term interest rates will start to rise by the third quarter of this year.”

Home resales are projected to rise a modest 0.8 per cent in 2014 to just over 461,000 units in Canada, standing close to the 10-year average of 467,000 units, according to RBC.

RBC’s outlook for housing affordability continues to be mixed, though the risks are skewed towards deterioration:

  • If prices continue to accelerate in key Canadian markets in the near-term, affordability could come under pressure. Potential offsets could come from a further drop in mortgage rates and/or rapid growth in household incomes.
  • The eventual normalization of monetary policy will lead to substantial increases in interest rates over the medium term, which could be too much for other affordability determinants to counteract.

“We expect the Bank of Canada to gradually raise the overnight rate starting in the middle of 2015, which will cause bond yields to drift gently upward,” said Wright. “This should mitigate the risk that higher rates will unhinge affordability levels.”

The majority of local markets saw affordability slip in the first quarter of 2014 relative to the previous quarter, RBC says. Concentrated in the two-storey home segment of the markets, Toronto and Calgary recorded some of the bigger increases; increases were generally modest elsewhere.

RBC’s housing affordability measure for the benchmark detached bungalow in Canada’s largest cities in the first quarter of 2014 is as follows: Vancouver 82.4 (up 0.9 percentage points from the previous quarter); Toronto 56.1 (up 0.2 percentage points); Montreal 38.9 (up 0.1 percentage points); Ottawa 36.4 (down 0.5 percentage points); Calgary 34.5 (up 0.9 percentage points); Edmonton 32.9 (down 0.2 percentage points).

The RBC Housing Affordability Measure, which has been compiled since 1985, is based on the calculated 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.

It is important to note that RBC’s measure is designed to gauge ownership costs associated with buying a home at present market values. It is not a representation of the actual costs incurred by current owners, the vast majority of whom have bought in the past at significantly different values than those prevailing in the latest period.

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