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 /CNW/ - 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 latest Housing 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.

Highlights from across Canada:

British Columbia: single-family homes less affordable

• Housing affordability continues to be poor in British Columbia. RBC measures rose 1.2 percentage points for two-storey homes and 0.9 percentage points for bungalows to 74.2 per cent and 68.4 per cent, respectively. The measure for condos remained unchanged at 33.6 per cent.

Alberta: attractive housing affordability conditions

• The provincial housing market continues to be among the stronger in Canada, supported by a booming economy, rapidly rising population and attractive affordability. RBC's measures rose a slight 0.1 percentage points to 32.6 per cent for bungalows and 0.4 percentage points to 20.2 per cent for condominiums. The measure for two-storey homes was unchanged at 34.4 per cent.

Saskatchewan: affordability plays a neutral role

• Owning a home in Saskatchewan became slightly more affordable for the most part in Q1 2014. RBC's measures fell in two of the three categories - bungalows by 0.6 percentage points to 36.4 per cent and condominiums by 0.1 percentage points to 25.4 per cent. The rise in the measure for two-storey homes - 0.5 percentage points to 40.7 per cent - reversed a decline that took place in the previous quarter.

Manitoba: housing becomes more affordable

• Manitoba homebuyers benefited from some improvement in affordability in the first quarter of 2014. RBC measures for both bungalows and condominiums fell in the first quarter to their lowest levels in nearly a year - by 0.4 percentage points and 0.6 percentage points, respectively. Although the measure for two-storey homes rose by 0.3 percentage points, it stands at a lower level than last spring.

Ontario: affordability deteriorates in single-family homes

• First quarter affordability measures point to a consistently eroding affordability picture in the province, particularly for single-family homes. RBC's measures stood at 24-year highs for bungalows at 44.9 per cent and two-storey homes at 51.0 per cent. The measure for condominiums was 29.4 per cent - not much below its multi-decade peak.

Quebec: housing affordability levels sit close to historical averages

• Housing affordability in the province did not erode much or at all in the first quarter and largely remain close to historical norms. RBC's measures edged higher by 0.2 percentage points for bungalows to 34.5 per cent and 0.1 percentage points for two-storey homes to 43.7 per cent. The measure for condominiums fell 0.1 percentage points to 26.6 per cent.

Atlantic: favourable affordability conditions do little to energize market

• The region's housing affordability conditions largely improved in the first quarter, but did little to pull the market out of its slump. RBC measures declined 0.4 percentage points to 31.2 per cent for bungalows and 0.4 percentage points to 25.9 per cent for condominiums. The measure for two-storey homes rose by 0.2 percentage points to 36.2, but remained below its long-term average.

The full RBC Housing Trends and Affordability report is available online as of 8 a.m. ET today.

SOURCE: RBC

Craig Wright, Chief Economist, RBC Economics Research, 416-974-7457
Robert Hogue, Senior Economist, RBC Economics Research, 416-974-6192
Elyse Lalonde, Communications, RBC Capital Markets, 416-842-5635