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Housing affordability deteriorates across Canada

Climbing prices key driver of erosion, says RBC Economics

Canada’s housing affordability eroded across all four housing types in the most recent quarter, according to the latest Housing Affordability report released today by RBC Economics.

“After posting broad-based improvements at the end of 2006, nationwide real estate affordability deteriorated in the most recent quarter, with price gains being the main factor,” said Derek Holt, assistant chief economist, RBC. “This erosion occurred despite the strongest gain in median before-tax household incomes in about a year-and-a-half.”

The RBC Affordability report measures the proportion of pre-tax household income needed to service the costs of owning a home. The most affordable housing class remains the standard condo, requiring 27.5% of income. A standard townhouse is next at 31.5%, followed by a detached bungalow at 39%. A standard two-storey home remains the least affordable housing type at 44%.

According to RBC, the positive correlation between sales-to-listings ratios and price gains means that most cities remain in net seller’s territory with sales growth outstripping listings. Some real estate markets – particularly cities in central Canada and B.C., – where both new listings and sales are tapering off simultaneously are likely to experience a controlled cooling.

While mortgage rates were flat in the first quarter of 2007, the substantial climb in rates in the second quarter is likely to continue with more hikes expected to come as the year unfolds. RBC forecasts short-term, prime-linked borrowing products will rise by a full percentage point by early next year, and with hikes likely starting this summer. Long-term mortgages are likely to rise by about 75 basis points from today’s levels next year. The end result could mean a more significant deterioration in affordability later this year.

Across the country, Alberta, Saskatchewan, Manitoba and Quebec witnessed a broad-based affordability deterioration. Standard two-storey homes in B.C. and the Atlantic region saw a slight improvement, while bungalows in Ontario bucked the nationwide deterioration.

RBC’s Affordability measure for a detached bungalow in Canada’s largest cities is as follows: Vancouver 68%, Toronto 43%, Calgary 40%, Montreal 35.4% and Ottawa 30.5%.

Ontario saw healthy income gains offset by modest house price growth, creating very little movement in affordability across all housing classes. Annual house price gains continue to bounce between three-to-five per cent, as Ontario’s real estate market continues to level off.

The Housing Affordability measure, which RBC has compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the real estate market. Alternative housing types are also presented including a standard two-storey home, a standard townhouse and a standard condo. The higher the reading, the more costly it is to afford a home. For example, an Affordability reading of 50% means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50% of a typical household’s monthly pre-tax income.


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