Affordability improved modestly across Canada in the third quarter of 2011

While the European sovereign-debt crisis in the past several months re-ignited tensions in global financial markets and heightened uncertainty about the

world economy, the effect on Canada’s housing market so far might not have been all negative. In fact, it appears that developments related to the crisis

likely provided some benefits in the form of lower interest rates. For instance, fixed mortgage rates (on a five-year, posted basis) eased to 5.3% in the third

quarter of 2011 from an average of 5.6% in the second quarter of this year. This ran counter to expectations of generally rising interest rates just prior to

this summer’s latest bout of global anxiety.

Lower mortgage rates lending a helping hand

Lower mortgage rates, in turn, contributed to lessening the costs of owning a home in Canada. Following two consecutive quarters of deterioration, housing

affordability improved broadly, albeit modestly, in Canada in the third quarter. At the national level, the RBC Housing Affordability Measures fell by 0.2

percentage points to 29.0% for condominium apartments, by 0.6 percentage points to 48.8% for two-storey homes and by 0.7 percentage points to 42.7%

for detached bungalows (a decline represents an improvement in affordability).

In the third quarter, Vancouver was much less of factor at the national level

In the third quarter, events in the Vancouver market did not have a disproportionate effect on the national totals, as the homeownership cost declines were

both widespread and of roughly similar magnitudes across the provinces and major cities. The affordability deterioration in the first and second quarters

reflected in large part significant increases in homeownership costs in Metro Vancouver. In the third quarter, the vast majority of provinces and cities experienced

modest declines in the RBC measures (typically less than 1 percentage point), with condominium apartments showing the smallest variations.

There were, nonetheless, some standouts: most notably, two-storey homes in Montreal and Manitoba, and detached bungalows in Vancouver and Montreal,

where the RBC measures dropped more meaningfully.

 

                           Affordability levels still posing little threat to housing demand overall

                          All in all, housing affordability levels still look reasonable in most parts of the country outside of British Columbia and pose a minimal threat to housing demand.

                          The share of household budget needed to cover the costs of owning a home at market values generally remains close to historical norm. We thus continue to believe

                           that the majority of local markets are, at worst, just slightly ‘unaffordable’. Of course, the Vancouver-area market continues to be a major exception, with sky-high

                          property values in upscale neighbourhoods making it both extremely unaffordable and the most at risk of a downward correction. Other markets where some signs of

                           unaffordability have emerged earlier this year include Toronto, Ottawa, and Montreal (although they mostly confined to the two-storey home category).

 

Stable affordability trends going forward

With increased global economic uncertainty likely to persist in the short term, we now expect that interest rates will remain exceptionally low in Canada

until the middle of 2012 and then rise only gradually thereafter. We also anticipate that the pace of home price increases will moderate further next

year amid flat housing demand. We believe that these factors will set the stage for a period of relative stability in affordability trends in Canada in the

coming year.

 

Ontario — Homeownership costs hold steady

Ontario households needed to allocate the same proportion of their income to wn a home at market prices in the third quarter as they did in the second

quarter. The RBC affordability measures for Ontario were unchanged in the latest period (condominium apartments being the only category moving by a

marginal -0.1 percentage points). Housing affordability, therefore, generally remained at just a slightly worse position than the historical average in the

province, with the two-storey homes segment perhaps showing some mild stress. This mostly neutral stance in affordability posed no obstacle to resale

market activity, which advanced by 3.8% in the third quarter. The overall Ontario market is balanced, and this sustains steady yet moderate price increases.

The number of homes for sale also is on the rise, and this will act to slow the pace of property appreciation even more in the period ahead

Toronto — Pushing the envelop

Despite pushing the envelope on the housing affordability front, the Toronto area market continued its march forward in the third quarter. Motivated

homebuyers drove sales of existing homes higher still, which has kept market conditions quite tight even as the number of units for sale rose. With the

sales-to-new listings ratio hovering around the 0.60 mark and the number of days on the market averaging less than one month, the Toronto area remains

a sellers’ market. Going forward, however, local housing demand might be facing some headwinds from strained affordability. While still nowhere near

the dangerous levels that prevailed in 1990, the RBC affordability measures clearly stand above the long-run averages for the area. In the third quarter,

the measures were little changed—rising marginally by 0.1 percentage points for detached bungalows, declining by 0.3 percentage points for two-story

homes, and staying flat for condominium apartments.