Canada's housing affordability mildly deteriorates, says RBC Economics

Published on by Association des Propriétaires du Québec

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Source: RBC Financial Group

Canada's housing affordability mildly deteriorates, says RBC Economics
Canada's housing affordability mildly deteriorated in the fourth quarter of 2005 due to relatively weak growth in household income, according to the latest Housing Affordability Index released today by RBC Economics.

"The erosion in Canada's housing affordability was largely attributed to slower growth in household income compared to the rest of the year. This was unable to offset increases in mortgage rates, house prices and utilities costs," said Derek Holt, assistant chief economist, RBC. "Although borrowing rates may continue to increase, we expect rates will remain stimulative to the economy for this year and next, while job markets remain strong."

The RBC Affordability Index measures the proportion of pre-tax household income needed to service the costs of owning a home. The most affordable housing type is the standard condo, with an index of 25.7 per cent. A standard townhouse is next at 30.1 per cent followed by a detached bungalow at 37 per cent. A standard two-storey home remains the least affordable housing type with an index reading of 43 per cent.

Affordability has deteriorated, but RBC notes that the pace of price appreciation has cooled in most parts of the country for almost all types of housing over the past year with the exception of British Columbia, Alberta, and Manitoba, which continue to experience double-digit annual price gains.

"The mild deterioration in housing affordability is likely to lead to a moderately slower pace of demand for new and existing homes in 2006 and 2007, but it will be a controlled slowdown in the housing markets as both new supply and demand are expected to cool simultaneously," added Holt.

According to the report, expected growth in home renovation spending, critical to the construction industry, will partly offset weaker new home construction. Canada's renovation spending has grown by over 50 per cent since 2000, to over $26 billion in 2005. RBC forecasts that renovation spending will remain strong as homes built in the 1980s boom will continue to enter their prime renovation years.

RBC's Affordability Index for a detached bungalow for Canada's largest cities is as follows: Vancouver 57.5 per cent, Toronto 42.7 per cent, Calgary 35.6 per cent, Montreal 34.1 per cent and Ottawa 33.1 per cent.

The decline in housing affordability spanned all provinces and all major cities. At the provincial level, the largest deteriorations were in British Columbia followed by Manitoba and Alberta. The worst hit cities were Vancouver and Calgary.

The Housing Affordability Index, which RBC has compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market. Alternative housing types are also presented including a standard two-storey home, a standard townhouse and a standard condo. The higher the index, the more costly it is to afford a home. For example, an Affordability Index of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household's monthly pre-tax income.

Highlights from across Canada:

- British Columbia: Although B.C.'s housing affordability remains the least favourable across the country thanks to soaring prices, higher borrowing rates and increased utility prices, its housing market continues to power ahead.

- Alberta: Alberta's housing affordability continued to deteriorate in the fourth quarter of 2005 with house prices climbing steadily. Alberta's booming energy sector had an impact on almost all sectors of the economy, but has particularly heated up the housing market.

- Saskatchewan: Even with slower house price growth, Saskatchewan still saw a mild deterioration in affordability as a result of a slowdown in the pace of year over year income growth, higher utility costs and higher mortgage rates.

- Manitoba: Manitoba's housing affordability weakened for a second consecutive quarter as growth in home prices, higher utility costs and higher mortgage rates overwhelmed income growth.

- Ontario: Ontario's housing market is showing signs of a controlled cooling down. Slower household income growth, higher mortgage rates and a jump in utility costs helped drive the decline in affordability.

- Quebec: Housing affordability eroded in the wake of rising mortgage rates. Quebec's housing market has already begun to cool with supply and demand slowing simultaneously without impacting house prices.

- Atlantic region: Higher mortgage rates, softer income growth and earlier price gains continue to weaken affordability for the second consecutive quarter in Atlantic Canada.

The full RBC Housing Affordability Index report is available online, as of 8 a.m. E.S.T. today at


For further information: Derek Holt, RBC Economics, (416) 974-6192; Jackie Braden, RBC Media Relations, (416) 974-2124; Archived images on this organization are searchable through CNW Photo Archive website at Images are free to accredited members of the media.

To request a free copy of this organization's annual report, please go to and click on Tools for Investors.

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