“Housing affordability improved modestly for the second consecutive quarter in the fourth quarter of 2010,”according to a Royal Bank of Canada study.
General National Trends:
“Homeownership costs were lowered by small decreases in the five-year fixed mortgage rate during October and November of 2010 amid minimal home-price appreciation. Outright declines in certain local markets were also observed. At the national level, the RBC Housing Affordability Measures fell depending on the housing type between 0.4 and 0.8 percentage points in the fourth quarter. A decrease represents an improvement in affordability”.
Provincial Trends:
“Housing Affordability Measures fell in the majority of provinces in the latest quarter. Only the standard two-storey benchmark became less affordable in Ontario and Quebec, as did the standard condominium apartment in Quebec and the Atlantic region. The most significant improvement occurred in Alberta, where falling home prices once more contributed to lowering the bar for homeownership. The Alberta market is the only provincial market showing year-over-year home price declines, reflecting soft market conditions – although there have been signs of tightening more recently. Weak to moderate declines in the RBC Measures registered in other provinces resulted primarily from lower mortgage rates. Home prices generally inched higher in the rest of the country – with exceptions in the condominium segments of British Columbia and Saskatchewan. In the final quarter of 2010, British Columbia continued to stand as the least affordable housing market in Canada and, therefore, endured the most stress. Compared to their respective historical norms, homeownership costs in Saskatchewan and Quebec also appeared to be somewhat elevated although both remained below national averages. At the other end of the spectrum, the RBC Measures in Alberta and Manitoba stood below their long-term average in all housing categories, indicating to us that there is little stress in these markets. In Ontario and the Atlantic region, the picture is mixed, with the affordability of some housing types above and others below historical norms.” inched higher in the rest of the country – with exceptions in the condominium segments of British Columbia and Saskatchewan. In the final quarter of 2010, British Columbia continued to stand as the least affordable housing market in Canada and, therefore, endured the most stress. Compared to their respective historical norms, homeownership costs in Saskatchewan and Quebec also appeared to be somewhat elevated although both remained below national averages. At the other end of the spectrum, the RBC Measures in Alberta and Manitoba stood below their long-term average in all housing categories, indicating to us that there is little stress in these markets. In Ontario and the Atlantic region, the picture is mixed, with the affordability of some housing types above and others below historical norms.”
Likely Future Trend
“The improvement in affordability in the last two quarters is likely to be short lived. Earlier this month, Canadian financial institutions raised posted mortgage rates for the first time since November 2010—by 0.25% to 5.44% in the case of the five-year fixed term. Given our expectation that the Bank of Canada will resume its rate hike campaign this spring (adding 100 basis points to the overnight rate this year and a further 150 basis points in 2012), borrowing costs are set to climb further still in Canada in the next two years. We believe that this will be the dominant factor that will cause housing affordability generally to erode across the country going forward, yet the magnitude of this deterioration is unlikely to derail the housing market. The effect of higher interest rates will be partly offset by rising household income amid a sustained economic recovery and job creation.
“The era of rapid home-price appreciation of the past 10 years has likely run its course overall in Canada, and we believe that we have entered a period of very modest increases. If anything, the recently announced changes to mortgage rules by the federal Minister of Finance will, at the margin, contribute to that slowing of activity
Trends in Ontario
“Concerns last year that the Ontario housing market would falter have now largely dissipated. Home-resale activity picked up smartly in the fall, and
property values resumed their appreciation trend in the closing months of 2010, by shrugging off a short-lived setback in the third quarter. The slowdown in market activity in the spring and summer last year largely reflected various transitory factors—including the introduction of the HST and
changes in mortgage lending rules—that brought demand forward to the start of the year. The silver lining of this slowdown, however, has been an improvement in affordability in the province. The RBC Measures edged lower for the second consecutive time for most housing categories in the fourth quarter, down by 0.2 to 0.3 percentage points. The only exception was two storey homes, which became marginally less affordable amid notable price gains. In our opinion, affordability plays a neutral role for housing demand in Ontario at this point, with RBC Measures close to their long-run average in the province.”
Trends in Toronto “The Toronto-area market sustained a rebound in activity in the latter part of2010, following a steep decline in the spring and early summer from unsustainably high levels last winter. The recovery confirmed our view that the earlier weakness had much more to do with the advancing of activity in the face of special factors (e.g., the HST and new mortgage lending rules) than the permanent evaporation of demand. With the influence of these transitory factors largely dissipating by the end of the summer, the Toronto-area market has since climbed its way back toward more sustainable levels of activity. Thanks primarily to lower mortgage rates, local home buyers enjoyed improved affordability for most housing categories in the fourth quarter”
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