Canadian Housing Affordability Outside of Danger Zone: RBC

The latest for Canadian housing affordability

Sometimes, a lack of news is the best-case scenario – especially when it comes to the housing market, one of the major catalysts in the oft-discussed global economic meltdown.

Canada’s kept its cool in the first quarter of 2013 with affordability lingering at a manageable level, according to RBC Economics Research’s Housing Trends and Affordability Report.

“The Canadian housing market cooled significantly in the past year; however, there is mounting evidence that activity is no longer weakening,” says Craig Wright, senior vice-president and chief economist at RBC. “A significant nation-wide price correction does not appear to be imminent so long as affordability remains outside of the danger zone.”

Less Price Swing Movement

Following trends from past housing market downturns in Canada, RBC says detached bungalows – the benchmark measure used – usually rises above the 44.5 per cent mark before prices plummet more than five per cent. In the first quarter of 2013 however, prices remained below the boiling point, increasing only 42.5 per cent.

The affordability of standard two-storey homes and condominium apartments held steady at 48 per cent and 28.1 per cent.

Affordability Based on Low Rates

This percentage refers to amount of pre-tax household income needed to service the costs of owning a specified category of home at going market values. While they’re currently at manageable levels, this is highly dependent on where Canada’s monetary policy will turn next.

“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,” added 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.”

Granted, that rise won’t come until the Canadian economy has developed its sea legs.

Resale Levels Still Low

Comparatively, home resales were down 13 per cent on a national scale compared to the first quarter of 2012, in part due to Finance Minister Flaherty’s changes to government-insured mortgages.

At a provincial level, some provinces experienced more adverse effects than others. Let’s explore how markets fared across the nation.

British Columbia – Still a Steep Buy

Canada’s most expensive province saw a glimmer of hope as homeownership drifted into more affordable territory. Of course, the market still has a ways to go before it resides within the province’s historical norm.

“The Vancouver-area’s affordability remains extremely poor and continues to weigh on the overall provincial housing market,” says Wright.

The measure for a detached bungalow fell 0.4 per cent to 65.9, while the two-storey home category saw a decline of 1.3 per cent to 71.3. Standard condominiums held at 33.4 per cent.

Alberta – A Boost in Buying Power

Don’t hate ‘em cause they’re successful.

“Despite higher prices and, in turn, a slight erosion in affordability in the first quarter, homebuyers in Alberta enjoyed substantial buying power thanks to their elevated income,” says Wright adding that the province remained among the most affordable in Canada. “Barring an unexpected shock to the economy, Alberta’s housing market should remain brisk in 2013.”

Across the board affordability rose grew by 0.2 per cent to 32.2 per cent for detached bungalows, 34.7 percent for two-storey homes and 19.8 percent for condominiums.

“Calgary-area buyers continue to benefit from a strong provincial economy, accelerating population growth and attractive affordability,” added Wright.

Saskatchewan – Somewhat of a Recovery

The prairie province seems to have regained lost ground.

“In the first quarter, Saskatchewan’s housing affordability showed the biggest improvement in the country – since this follows on the heels of noticeable deterioration at the tail end of 2012, the market is really just regaining lost ground,” says Wright. “Swings in home prices have been responsible for the volatile levels of affordability in the province in the past year.”

The bank’s measure for a detached bungalow slipped 1.0 percentage points to 38.1, while the affordability of two-storey homes fell 1.7 per cent to 41.2 and condos declined 0.3 per cent to 26.5.

Manitoba – Freezing Winter Conditions

“Manitoba’s existing home market had a record year in 2012. Winter 2013, however, was a different story, as home resales particularly weak in February and March,” say Wright. “The weakness might just be the market catching its breath, but it could also reflect the modest deteriorating trend in affordability taking its toll on the province’s home buyers.”

RBC’s measure for detached bungalows rose 0.8 per cent to 38.9, condos climbed 0.4 per cent to 24.4 and two-storey homes saw a modest increase of 0.2 percent to 38.7.

Ontario – Consistently Subdued

Surprisingly, Ontario saw very little change.

“During the first quarter of this year, Ontario’s housing market continued its transition from slightly hot to more temperate conditions – resale activity remained subdued, demand and supply stayed somewhat more balanced and price increases eased off a little,” says Wright. “Developments in the Toronto-area housing market so far in 2013 should ease concerns that cooler activity might morph into a full-blown retreat.”

Bungalows increased 0.8 per cent to 53.8, while two-storey homes rose 0.3 per cent to 62.7 and condos climbed 0.2 per cent to 33.5.

Quebec – Buyers Call For Caution

Canada’s “belle” province was all over the place in terms of affordability.

“Heightened caution in the Quebec housing market led to the second weakest showing in provincial home resales data in 10 years in the first quarter of 2013,” says Wright. “We have no doubt that the collective weight of uncertain economic prospects and stricter mortgage insurance rules took a toll on home buyer confidence; what is less clear, however, is whether affordability played a role.”

Bungalows rose 0.4 per cent to 33.3, while two-storey homes rose a negligible 0.1 per cent to 41.3 – slightly worse than historical averages for both categories. Condos, on the other hand, fell 0.6 per cent to 27.

“The Montreal housing market still faces some challenges ahead, most notably the record-high number of housing units currently under construction – 85 per cent of which are condos,” says Wright. “There is a risk that this construction boom could fuel a jump in the number of homes for sale and disturb the balance we are seeing in the resale market.”

Atlantic Canada – Most Accessible to Buyers

The East coast continued its attractive trend.

“With the exception of Saint John and Fredericton, Atlantic Canada’s housing market continues to be generally balanced,” says Wright. “More recently, however, we’re seeing the region trend toward increasingly looser conditions, which has reduced the pricing power of sellers and slowed housing price gains, keeping affordable housing within reach for many.”

RBC’s affordability measure for bungalows increased by 0.6 per cent to 32.6, while two-storey homes saw a 0.5 per cent rise to 36.9 and condos rose 0.4 per cent to 26.9

The bank expects market activity to continue the mellow trend with a mild strengthening as the negative effects of the mortgage insurance rule changes gradually dissolve.

Related Topics

Buying A Home / Economic News / Mortgage News / Mortgages

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