TORONTO, May 23, 2013 /CNW/ - Canada's housing market remained under moderate affordability-related stress in the first quarter of 2013, as housing affordability stayed in the holding pattern that began in early 2010, according to the latest Housing Trends and Affordability Report issued by RBC Economics Research. Housing affordability was largely unchanged in the latest period, as it was largely the status quo for mortgage rates, home prices and household incomes.
"The Canadian housing market cooled significantly in the past year; however, there is mounting evidence that activity is no longer weakening," said Craig Wright, senior vice-president and chief economist, RBC. "A significant nation-wide price correction does not appear to be imminent so long as affordability remains outside of the danger zone."
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 going market values (a rise in the measure represents deterioration in affordability).
During past housing market downturns in Canada, RBC estimates that the measure for the benchmark detached bungalow most often climbed above the 44.5 per cent mark before prices fell more than 5.0 per cent (peak to trough). At 42.5 per cent (up by 0.3 percentage points) in the first quarter of this year, the bungalow measure remained below this critical threshold.
During the first quarter of 2013, measures at the national level were unchanged in the two other categories of homes tracked. RBC measures for the standard two-storey home and condominium apartment categories remained at 48.0 per cent and 28.1 per cent, respectively.
Exceptionally low mortgage rates have been the chief factor in keeping homeownership costs relatively affordable, RBC says.
"While affordability levels are manageable at this point, we'd be humming a very different tune if interest rates were to suddenly rise substantially. Fortunately, the likelihood of a surge in rates is slim at this stage," said Wright. "We believe that the more probable scenario in Canada is one of low interest rates over the next two years; we expect the Bank of Canada to begin gradually raising the overnight rate in mid-2014."
RBC notes that when interest rates eventually rise, it will be because the Canadian economy is on stronger footing. Part and parcel of this stronger economic environment will be heftier household income gains, which would work to offset any negative impact on affordability.
The housing market is clearly cooler than it was just a year ago; home resales were down 13 per cent nationally in the first quarter of this year relative to the same period in 2012. RBC notes that much of the decline took place in the months following the latest changes to government-insured mortgage insurance rules implemented in July. Activity appears to have stabilized since then - first-quarter resales were unchanged from the fourth quarter of 2012.
Home prices in Canada gave up some ground after a peak in June of 2012, but have generally held up so far in 2013, thanks to predominantly balanced markets in Canada. RBC says that in the past year as demand cooled, the supply of homes for sale also curbed, helping to maintain balanced conditions.
RBC expects market activity to remain subdued this year. However, as the negative effects of the mortgage insurance rule changes gradually dissipate, there could be a mild strengthening from recent monthly levels.
In Canada's local markets, there were some divergences in affordability trends in the first quarter of 2013, but, in most cases, changes were minimal. Vancouver continues to be the least affordable market in the country by far. RBC notes that, to a lesser extent, Toronto and Montreal are other city markets showing signs that homeownership is a bit of a stretch for a typical household budget - particularly in the single-family home segments. Other local markets tracked by RBC stand within historically safe ranges.
RBC's housing affordability measure for the benchmark detached bungalow in Canada's largest cities is as follows: Vancouver 82.3 per cent (up 0.1 percentage points from the previous quarter); Toronto 53.8 per cent (up 0.8 percentage points); Montreal 40.1 per cent (up 0.6 percentage points); Ottawa 39.1 per cent (up 0.1 percentage points); Calgary 38.7 per cent (up 0.8 percentage points); Edmonton 30.4 per cent (down 0.2 percentage points).
The RBC Housing Affordability Measure, which has been compiled since 1985, is based on the 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.
Highlights from across Canada:
- British Columbia: affordability improves, but still has a long way to go
Homeownership in the province became slightly more affordable in the first quarter, though the market has a long way to go before homebuyers can experience more normal levels by historical standards. RBC measures fell by 0.4 percentage points for bungalows and by 1.3 percentage points for two-storey homes. The measure for condominiums remained unchanged.
- Alberta: slight erosion in affordability does little to deter homebuyers
High household incomes in the province kept homebuyers unfazed by the slight erosion in affordability in the first quarter. Alberta's housing market remains a bright spot in Canada despite the fact that affordability measures rose slightly by 0.2 percentage points across all housing types tracked by RBC.
- Saskatchewan: biggest affordability improvement in Canada
Following a noticeable deterioration in the fourth quarter of 2012, Saskatchewan's affordability levels registered the largest improvement across Canada in kicking-off 2013. RBC measures fell by 1.7 percentage points for two-storey homes, 1.0 percentage point for bungalows and 0.3 percentage points for condominiums.
- Manitoba: second consecutive quarter of affordability deterioration
Manitoba's affordability levels deteriorated for the second straight quarter in the first quarter of 2013, though levels are still not considered dangerous for provincial homebuyers. The RBC measures rose modestly across all housing categories - up 0.8 percentage points for bungalows, 0.4 percentage points for condominiums and 0.2 percentage points for two-storey homes.
- Ontario: affordability conditions extend their recent trends
Ontario's affordability conditions in the first quarter of 2013 were by and large an extension of recent trends - a deterioration in the single family homes categories and a standstill for the condominium category. RBC's measures for both bungalows and two-storey homes rose by 0.4 percentage points, while the measure for condominiums remained unchanged.
- Quebec: affordability variations a mixed bag
Affordability levels in Quebec remain modestly worse than they have been historically for single family homes, which could be contributing to homebuyers' hesitation in pulling the trigger on purchases over the past year. In the first quarter of 2013, RBC measures were a mixed bag, with bungalows and two-storey homes rising 0.4 percentage points and 0.1 percentage points, respectively, and condominiums declining 0.6 percentage points.
- Atlantic Canada: cooling housing market keeps affordability attractive
Increasingly looser housing market conditions have reduced sellers' pricing power, keeping affordability fairly attractive in Atlantic Canada. First quarter measures rose very modestly, between 0.4 and 0.6 percentage points, for all categories tracked by RBC.
The full RBC Housing Trends and Affordability report is available online, as of 8 a.m. ET today, at rbc.com/economics/market/.
For further information:
Craig Wright, Senior Vice-President and Chief Economist, RBC, 416 974-7457
Robert Hogue, Senior Economist, RBC, 416 974-6192
Elyse Lalonde, Manager, Corporate Communications, RBC Capital Markets, 416 842-5635