RBC Economics recently released its analysis of housing affordability in Canada and it shows that overall average affordability, at the national level, has improved slightly over the last two quarters. Unfortunately, part of the decline in housing costs is related to small declines in mortgage rates, an issue that is not likely sustainable over the long-term.
A detached bungalow now costs 42.1 percent of household income (down 0.2 percentage points), a two story home now costs 47.8 percent of household income (down 0.3 percentage points) and a condo apartment now costs 28.0 percent of household income (down 0.2 percentage points). You can quite quickly see that the declines are modest at best, especially when one looks at the history of affordability as seen here:
As I noted above, it is the Bank of Canada's ultra-low interest rate that are keeping housing affordability at their current levels. Affordability, on average, will be far worse when interest rates rise to their historical norms as shown on this chart of five year mortgage rates from the Bank of Canada:
With prices spiralling upward, particularly in selected markets, exceptionally low interest rates have kept affordability from reaching dangerously high levels.
are clearly showing that residential property values in Canada are elevated to multi-decade highs.
On a seasonally adjusted basis, home resales in the fourth quarter of 2012 were down a cumulative 8.8 percent from the second quarter. The only saving grace was very strong resale activity in the first quarter of 2012; this kept resale volumes to a 1.2 percent year-over-year decline however, the trend is not good. Soft demand in some markets have become more common since the summer and, in some markets, month-to-month price declines have taken place. In Vancouver for instance, prices have even crossed back over the point that they were at in 2011.
Let's look at two of the most over-priced markets in a bit of detail.
1.) Ontario: Both sales volumes and home price increases moderated over the last quarter of 2012. While the ownership costs of condo apartments and bungalows fell by 0.3 and 0.1 percentage points respectively, the cost of owing a two-story home rose by 0.1 percentage points as shown here:
Let's look at some details keeping in mind that affordability includes the cost of mortgage payments, property taxes and utilities as a proportion of pre-tax household income:
Average Price: $389,000
Affordability: 42.9 percent
Minimum Qualifying Income: $84,500
Average Price: $442,700
Affordability: 48.9 percent
Minimum Qualifying Income: $96,300
Here's the situation in Toronto:
Average Price: $545,600
Affordability: 52.8 percent
Minimum Qualifying Income: $111,400
Average Price: $640,500
Affordability: 62.2 percent
Minimum Qualifying Income: $131,300
Here's a graph showing the historical data for Toronto:
2.) British Columbia: For the second quarter in a row, affordability in B.C. improved with a drop of 1.1 percentage points for condo apartments and 1.0 percentage point for bungalows. Unfortunately, two-story homes became less affordable by 0.4 percentage points following a decline of 3.2 percentage points in the second quarter of 2012. Overall home resales dropped by 11.9 percent on a year-over-year basis with prices down between 0.8 percent and 4.0 percent depending on the type of housing, mainly driven by changes in the Vancouver market. Here is a look at housing affordability for the province as a whole:
Average Price: $604,600
Affordability: 66.4 percent
Minimum Qualifying Income: $116,400
Average Price: $659,700
Affordability: 72.7 percent
Minimum Qualifying Income: $127,300
Here's the situation in Vancouver where home resales fell 23 percent in 2012 on a year-over-year basis to the lowest level in 12 years (excluding the 2008 recession):
Average Price: $782,600
Affordability: 82.2 percent
Minimum Qualifying Income: $147,200
Average Price: $832,800
Affordability: 87.8 percent
Minimum Qualifying Income: $157,200
Yes folks, you read that right. Owning and operating a bungalow in Vancouver will consume 82.2 percent of your pre-tax household income and owning and operating a two-story in the same city will consume a whopping 87.8 percent of pre-tax income. That doesn't leave much room for spending on fun things like food and transportation, does it?
Fortunately, for Atlantic Canadians, the average cost of owning that nice little bungalow in a small, relatively uncrowded urban area consumes only 31.9 percent of pre-tax household income, a positive dream by comparison.
Is real estate affordability improving in Canada? In some markets, particularly on the Prairies and in Atlantic Canada, homes are still affordable by a median family. In certain markets, namely Toronto and Vancouver, the small price readjustments that have taken place will easily be wiped out by a small increase in interest rates. Overall, it certainly appears that Canada's real estate market is highly vulnerable since one factor alone is keeping things in check - Mr. Carney's ultra-long, ultra-low interest rate policy.