Housing affordability improves for second consecutive quarter: RBC Economics

Modest improvements at the end of 2011 lighten the load on household budgets

TORONTO, March 7, 2012 /CNW/ - Canada's housing market made further steps on a promising path in the closing months of 2011 as affordability improved for the second consecutive quarter, according to the latest Housing Trends and Affordability Report released today by RBC Economics Research. Canadian homebuyers benefited from softer home prices and income gains that helped lighten the load on their budgets in the fourth quarter of 2011.

"The improvement in affordability was modest for the most part, but still significant enough to dial back the deterioration that impacted the market in spring last year," said Craig Wright, senior vice-president and chief economist, RBC. "As a result, the cost of owning a home at market price represented slightly less of a pinch on household budgets in the fourth quarter. Continued low interest rates in 2012 will help keep housing costs at bay in the near term."

The report explains that the erosion of national affordability levels witnessed in the first half of 2011 were mainly a manifestation of dramatic increases in homeownership costs in Metro Vancouver. Developments in the Vancouver area market during the second half of 2011 were more closely aligned to trends in other Canadian markets and had less of an impact on the national picture.

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.

During the fourth quarter of 2011, measures at the national level fell for all housing categories tracked by RBC (a fall represents an improvement in affordability). The two-storey home category showed the most notable improvement.

"At this point, housing in Canada is essentially as affordable as it was a year ago, and only slightly less affordable on average than it has been over the long term," Wright noted. "All things considered, the housing market is sitting in a reasonably balanced position overall, despite some minor stress being exerted on housing demand."

Where housing affordability stands in Canada

Nearly all provinces and major cities saw an improvement in homeownership costs, led by British Columbia and, in particular, Vancouver. Nevertheless, the proportion of a typical Vancouver household's income that would go towards owning a home is still extremely high. RBC says that these tough conditions will continue to be a tall hurdle to clear for local homebuyers.

RBC's housing affordability measure for the benchmark detached bungalow in Canada's largest cities is as follows: Vancouver 86.0 per cent (down 4.6 percentage points from the previous quarter), Toronto 52.2 per cent (down 0.1 percentage points), Montreal 40.1 per cent (down 0.7 percentage points), Ottawa 40.9 per cent (down 0.1 percentage points), Calgary 36.7 per cent (down 0.7 percentage points) and Edmonton 32.8 per cent (down 0.3 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 improving but remains poor

B.C.'s housing market improved for the second consecutive quarter in the final months of 2011 due to a further reversal of earlier substantial increases in home prices, particularly in the Vancouver area, as well as income gains arising from steady job creation. Despite the fact that B.C. registered the most significant reduction in homeownership costs in the country, the provincial housing market remains the least affordable in Canada.

Measures fell between 0.7 and 2.5 percentage points. RBC expects poor affordability to weigh on local housing demand in the coming year.

• Increased risks in the Vancouver-area housing market modestly subsided in the fourth quarter - a notable improvement over spring 2011, when it recorded the worst levels of affordability ever witnessed in the annals of Canadian real estate. Vancouver home prices have moderated since the middle of 2011, and affordability measures fell quite substantially in the fourth quarter for all housing types (between 2.0 and 4.6 percentage points). Still, RBC notes that owning a home at current prices would take up the lion's share of a typical household budget, which will continue to be a deterrent for local buyers.

Alberta - affordable, yet buyers remain hesitant

Alberta's housing prices became more affordable in the final quarter of 2011, which helped to pull measures down to their lowest or second lowest points since 2005 (they fell between 0.5 and 0.7 percentage points). In spite of such attractive affordability, the pace of home resales noticeably slowed. Going forward, a strong labour market and affordable housing should shake off any hesitation that Alberta homebuyers may have.

• After showing an encouraging start in 2011, home resales in the Calgary area stayed mostly flat for the rest of the year and ended with a marginal decline in the fourth quarter. This lacklustre performance was surprising given the strength in Calgary's labour market (31,000 net new jobs were created in 2011) and the attractive affordability levels (measures fell for all housing categories between 0.2 and 0.7 percentage points). RBC expects strong market fundamentals will help the Calgary market turn a corner in the period ahead.

Saskatchewan - resales surge to the highest level in almost four years

Housing affordability improved across most types of housing in Saskatchewan in the fourth quarter of 2011, as RBC measures moved close their long-run averages. The province experienced a surge in home resales, which reached the highest level in almost four years. Affordability is unlikely to weigh on homebuyers at this point, particularly as strong economic growth is expected to continue spurring Saskatchewan's housing demand this coming year.

Manitoba - bucking the improving trend in affordability

Manitoba was the only province to experience a slight deterioration in affordability in the fourth quarter. Strong housing demand tightened market conditions and gave way to price increases, particularly for two-storey homes and condominiums. Market activity was especially brisk in Winnipeg in the closing months of 2011, where existing home sales reached record levels. Although housing has become slightly less affordable, RBC's housing measures for Manitoba remain close to long-run averages, which suggests little in the way of undue pressure being applied on the province's homebuyers.

Ontario - sellers hold on to the upper hand

Like most of the other provinces, it became slightly easier to own a home in Ontario during the fourth quarter of 2011. RBC measures fell modestly between 0.2 and 0.3 percentage points, partly reversing the notable deterioration in the first half of last year. Still, the proportion of household income needed to cover homeownership costs remained slightly higher than average. This does not appear to be a strain on homebuyers in the province at this stage. Home resales advanced at a good clip in the fourth quarter and the tight availability of homes gave sellers the upper hand.

• Affordability in Toronto's housing market continues to be slightly strained, although some improvement was registered in the fourth quarter with RBC measures easing between 0.1 and 0.5 percentage points. Relatively high prices did not seem to unnerve homebuyers as resale activity continued to advance at a brisk pace in the closing months of last year. The Toronto-area market remained slightly more favourable for sellers, which will present a challenge with respect to any improvements in affordability in the near term.

• The Ottawa area affordability picture was mixed in the final quarter of 2011. Changes in the RBC affordability measures for the area ran the full gamut, keeping levels above long-term averages. Still, fourth quarter home resales powered ahead and prices were bid higher for all housing types. It remains to be seen whether this strong market momentum will be maintained in the period ahead.

Quebec - steady as she goes

Housing affordability in Quebec stood in the neutral zone, with RBC's fourth quarter measures for the province equaling, or coming very close to, their long-run averages. There was a broad-based improvement across all housing types; in particular, two-storey homes registered a substantial improvement that reversed the deterioration observed in the first half of 2011. With affordability firmly in neutral, balanced market conditions will keep the Quebec market reasonably stable in the coming months.

• The Montreal area continued to reverse the earlier deterioration in housing affordability and recorded some of the country's more substantial improvements for the second consecutive quarter, with RBC measures falling between 0.7 and 2.0 percentage points. Home resales in the area dropped 2.4 per cent in the fourth quarter, which can largely be attributed to weaker labour market conditions observed in the last half of 2011. This fall will continue to weigh on housing demand and market conditions in the near term.

Atlantic - considerable pick up in resale activity

Echoing market conditions and developments at the end of 2010, Atlantic Canada closed 2011 on a positive note, with significant pick-up in resale activity and back-to-back affordability improvements. Resale strength in the fourth quarter was particularly remarkable in Halifax, which may be a reflection of a burst in optimism following the announcement of the $25 billion federal government frigate order. St. John's also saw a surge in housing activity. While most markets within the region remain balanced, Halifax is closing in on becoming a sellers' market, and Saint John remains a buyers' market.

The full RBC Housing Trends and Affordability report is available online, as of 8 a.m. ET today, at rbc.com/economics/market/.

Image with caption: "Where housing affordability stands in Canada: RBC Economics (CNW Group/RBC)". Image available at: http://photos.newswire.ca/images/download/20120307_C2346_PHOTO_EN_10841.jpg

Craig Wright, Senior Vice-President and Chief Economist, RBC, 416 974-7457
Robert Hogue, Senior Economist, RBC Economics Research, 416 974-6192
Elyse Lalonde, Manager, Corporate Communications, RBC, 416 842-5635