Rising prices, mortgage rates hits home affordability in Canada: RBC - Macleans.ca
 

Rising prices, mortgage rates hits home affordability in Canada: RBC


 

OTTAWA – Higher prices and an increase in mortgage rates have made home affordability more of a problem for the average Canadian family, says a new report from the Royal Bank of Canada (TSX:RY).

RBC’s latest research on the portion of average household income needed to maintain a home shows that affordability deteriorated over the summer, the second consecutive drop in as many quarters.

The level of deterioration differs from region to region and between types of homes, but for the average bungalow the affordability measure rose 0.7 of a percentage point to 43.3 per cent nationally in the third quarter, after a 0.3-percentage-point gain in the second quarter.

That means the average household would have needed to devote 43.3 per cent of its pre-tax income to service the cost of owning a bungalow at current market values, including mortgage payments, utilities and municipal taxes. The higher the rating, the less affordable a home is to any particular family.

For two-storey homes, the affordability reading rose 0.6 or a percentage point to 48.9 per cent in the July-September period.

Owning a condominium was the most affordable option, with a cost measure of 28 per cent of pre-tax income, and the most stable, up just 0.1 of a percentage point from the previous period.

RBC chief economist Craig Wright attributed the deterioration in affordability to higher prices and what has been a tightening mortgage market reacting to an expectation of firming interest rates.

“By the third quarter, strong resale activity across Canada heated up home prices a few degrees,” he explained. “At the same time, Canadian bond yields rose in tandem with those in the U.S., climbing in anticipation of the Fed (U.S. Federal Reserve) tapering its bond buying program.”

The most recent Canadian Real Estate Association report pegged the average resale price of a home at $391,820 in October, 8.5 per cent more than a year earlier.

Wright said recent months has seen a divergence in prices for Canadian homes, with price gains for bungalows and two-storey structures outpacing condominiums.

Affordability deteriorated in many of the large markets, but while the average number is only moderately higher than historic norms, RBC notes there is a wide disparity in the associated costs depending on markets, with some appearing out of reach of the average family.

It would take 84.2 per cent of an average household’s pre-tax income to maintain a home in Vancouver, a rise of two percentage points from the second-quarter reading.

In Toronto, the affordability measure rose 1.3 percentage point to 55.6 per cent, the second worst in the country.

Most other major markets had affordability scales that were closer to historic norms: Montreal rose 0.3 of a point to 38.3 per cent; Ottawa was up 0.4 of a point to 37.3, Calgary up 0.7 of a point to 33.7 and Edmonton up 0.5 of a point to 32.9 per cent of household income.

The report says the biggest risk to maintaining manageable affordability levels would be a sharp rise in interest rates, but many analysts believe that is unlikely to occur as long as global economic growth remains moderate and inflation pressures soft.

The RBC says it does not expect the Bank of Canada to start hiking rates until sometime in 2015 as bond yields, the main driver of fixed mortgage rates, are projected to drift only “gently” upwards in the next year or so.


 
Filed under:

Rising prices, mortgage rates hits home affordability in Canada: RBC

  1. ‘ “By the third quarter, strong resale activity across Canada heated up home prices a few degrees,” he explained. ‘

    As a longtime subscriber to Macleans magazine, I honestly ask you either remove the quote or get a clarification for what it means. Will the housing market soon reach its boiling point and change state, the logical continuation of the metaphor? What liquid is our housing market – because that bears direction implications as to its temperature. Are pressures being exerted on the housing market to get that temperature raise, which is a thing when we consider heating and cooling?

    Look – as someone with both HVAC/R as-well-as theatre/english experience in post-secondary settings, I can enjoy and appreciate a good metaphor. But when it comes to trying to understand the complexities (to me) of the housing market? How about a real quote with real meaning to real people who want to really own a house?

  2. this makes getting a house almost a pipe dream, very discouraging

  3. People are tired of hearing and
    reading about the mortgage rates that are rising each year and the prices for
    real estate that are incredible. In Toronto, the
    affordability measure rose 1.3 percentage point to 55.6 per cent, the second
    worst in the country…very good…no words. We’re at one of those points in the
    economic cycle where mortgage rates get especially confusing. I’m just
    so thankful we have already bought our house. I feel really bad for the next
    generation trying to buy a home today, it’s so expensive.