The Cana­dian Press

Buy­ing a home in Canada should become more afford­able this year, with inter­est rates being low­ered in hopes of avoid­ing a reces­sion and mort­gage rates declin­ing, real estate observers suggest.

In its lat­est hous­ing afford­abil­ity report released Thurs­day, the Royal Bank of Canada said that after home­own­er­ship costs climbed steadily in 2007, mainly because of higher prices in boom­ing west­ern Cana­dian cities, homes should become eas­ier to buy and finance this year.

As a result of the recent low­er­ing of inter­est rates by the Bank of Canada that has led to lower rates on mort­gages tied to the drop­ping prime rate, con­sumers should see afford­abil­ity improve across all classes, said Derek Holt, assis­tant chief econ­o­mist at RBC.

“Longer-term mort­gage rates will come down because the spreads charged for bank lend­ing and bor­row­ing in inter­na­tional mar­kets are likely to come down a lit­tle bit, and that will get passed on to longer-term bor­row­ers,” said Holt.

For short-term mort­gages, the cen­tral banks are prob­a­bly going to con­tinue to push inter­est rates lower, he said.

“We’re expect­ing the Bank of Canada to cut rates by a fur­ther 100 basis points or a full per­cent­age point from where they stand right now.”

Let’s face it, said Peter Nor­man of real estate research firm Altus Clay­ton, “if you have an expec­ta­tion that mort­gage inter­est rates are going to decline by 50 basis points or so, then it would be rea­son­able to expect that that would prob­a­bly bring about an improve­ment in afford­abil­ity.” (A basis point is one-hundredth of a per­cent­age point.)

But it’s impor­tant to also point out that the dete­ri­o­ra­tion in afford­abil­ity in the last cou­ple of years hasn’t been interest-rate dri­ven per se, he said.

“It’s been mainly due to ris­ing house prices in the West.”

Afford­abil­ity steady in Toronto, Cen­tral Canada

In fact, in real estate mar­kets like Toronto and else­where in Cen­tral Canada and the East, afford­abil­ity has been rea­son­ably steady.

In Alberta, though, “there were very severe short­ages of labour and mate­ri­als, and other aspects that went into the pro­duc­tion of hous­ing,” said Nor­man. This forced hous­ing prices up, affect­ing affordability.

Holt said almost every hous­ing class in every province and major city saw afford­abil­ity dete­ri­o­rate last year.

Unlike the late 1980s and early 1990s when double-digit unem­ploy­ment rates and inter­est rates led to a hous­ing crunch and declin­ing afford­abil­ity, the prime cul­prit this time around has been a long string of house price gains that have out­stripped income gains, he said.

The Royal’s afford­abil­ity report mea­sures the pro­por­tion of pre-tax house­hold income needed to ser­vice the costs of own­ing a home. All of Canada’s big banks have been increas­ingly inter­ested in track­ing house trends across the coun­try since a big chunk of their prof­its come from mort­gage lend­ing to homebuyers.

Con­dos most afford­able type of housing

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%. A stan­dard two-storey home remained the least afford­able hous­ing type at 47%.

New record highs for the amount of house­hold income going towards home own­er­ship costs are being set across most hous­ing classes in British Colum­bia, Alberta and Saskatchewan, the report said.

But there is some light at the end of the tun­nel that should help afford­abil­ity, besides declin­ing mort­gage rates, said Nor­man. In Alberta, “we’re start­ing to see a rever­sal” in the dete­ri­o­ra­tion of affordability.

Many of the scarci­ties in labour and sup­plies “are start­ing to become addressed, and also the demand has got­ten a lit­tle bit softer” as peo­ple have started to leave the province in search of work in other west­ern provinces such the oil­fields in Saskatchewan, he said.

Both of these devel­op­ments, said Nor­man, should bring the real estate mar­ket much more back into bal­ance into 2008.

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