Canada’s houses too expensive: RBC

May 30, 2012 | Last updated on May 30, 2012
3 min read

Canada’s housing affordability has deteriorated in the early months of 2012, after two consecutive quarters of encouraging improvements, says the latest Housing Trends and Affordability Report by RBC Economics Research.

Vigorous homebuyer demand pushed home prices higher during Q1 2012, driving up the costs of owning a home in Canada.

“It became a little tougher on household budgets to carry the costs of owning a home at market prices at the start of 2012,” says Craig Wright, senior vice-president and chief economist, RBC.

He adds, “Strong buyer demand was the principal driver of the modest rise in homeownership costs. While the deterioration in affordability was felt across the country, however, it was mild in most cases.”

RBC expects home affordability to become more of a challenge once the Bank of Canada begins raising interest rates in the fourth quarter of 2012—assuming the European economy stays on the rails.

“Exceptionally low interest rates have been the key force in keeping affordability from hitting dangerous levels in Canada in recent years,” says Wright. “We anticipate the central bank will begin hiking rates gradually, however, which should help mitigate any widespread negative impact on the housing market.”

There were major difference in housing costs across Canada; BC housing markets are situated at the weaker end of the affordability spectrum, while housing in Alberta and Atlantic Canada is more reasonably priced.

Ontario housing is expensive, while markets in Saskatchewan, Manitoba and Quebec offer more attractive prices.

The RBC housing affordability measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow (a reasonable property benchmark for the housing market in Canada) at market value. Alternative housing types are also presented, including a standard two-storey home and a standard condominium apartment.

The higher the reading an area receives, the more expensive the homes in that specific area—for instance, an affordability reading of 50% means that homeownership costs, including mortgage payments, utilities and property taxes, would take up 50% of a typical household’s monthly pre-tax income.

Here are the results for Canada’s largest cities: Vancouver is 88.9%; Toronto is 53.4%; Ottawa is 41.8%; Montreal is 41.4%; Calgary is 36.7%; and Edmonton is 32.4%.

Canadian highlights

In B.C., housing costs remained high in the first quarter. These prices are likely weighing on buyer demand and are a key factor behind the downward trend in home re-sales since last fall.

Alberta has attractive affordability and increased housing market activity. A strong provincial economy helped pushed home re-sale activity up 11.5% year-over-year. As Alberta continues to lead the country in economic growth, RBC expects brisk housing activity to persevere.

Saskatchewan affordability has improved, re-sales have surged to record highs, and it’s the only province to show across-the-board improvement in its housing market. Minor price increases—or even declines in the case of two-story homes—in the first three months of the year helped lower the cost of owning a home for all housing categories in the province.

Measures fell between 0.2% and 2%, bringing affordability levels even closer to long-term averages, and implying that any undue stress on homebuyers is dissipating.

Affordability isn’t an obstacle for homebuyers in Manitoba, as there was little change in housing affordability in 2011. With RBC measures moving only slightly, the province has one of the most affordable markets in the country.

The share of household income needed to cover the costs of owning a home at market value is in line with historical norms. So far this year, re-sales have been quite volatile, registering a decline in the first quarter. RBC expects this will be temporary.

Housing affordability in Ontario has eroded slightly in the first quarter of 2012, amid rising home prices in some of the province’s largest markets. Prices are higher, especially for single-family homes, and property values appreciated the most in the past year.

While this may cause some underlying stress in the market, it hasn’t slowed housing demand in the province.

Quebec saw the strongest increases in single-family home prices in Canada, causing a notable deterioration in affordability for both detached bungalows and two-storey homes. Affordability remains within range of historical norms, however, and isn’t pressuring homebuyers as yet.

Atlantic Canada’s housing prices are manageable, following back-to-back improvements in the latter half of 2011. The share of household budget needed to cover the costs of owning a home remained in line with long-term averages and compared favourably with other provinces.

Home re-sales picked up further in the first quarter, but RBC says home price appreciation in Atlantic Canada did remain subdued.