Housing affordability at worst level since 1990, says RBC Economics

Eric Shackleton, THE CANADIAN PRESS
TORONTO - For homeowners or those seeking to buy one, relief from deteriorating affordability is just around the corner, says a Royal Bank (TSX:RY) study, despite reporting the cost of owning a home reached its highest level since 1990 at the end of last year.

"We're forecasting both short-and long-term mortgage rates to fall further" in the months ahead, improving affordability in many areas of the country, Derek Holt, assistant chief economist at the Royal Bank, said in an interview Friday.

"The Bank of Canada should be cutting rates further as the year wears on, so that will bring variable rate products down further," he said.

"The longer-term five-year mortgage, we're forecasting that it'll drop by about three quarters of a percentage point by year end."

Back in the 1990s, housing affordability deteriorated across the country, with soaring interest rates and a recession sparking much of the trouble.

Last year, "a long upward trend in house prices driven by a strong economy that has seen growth in the job market" was the primary driver for deterioration in affordability, Holt said.

The affordability study, which measures how much pretax household income it takes to own a home, found that condos are the cheapest, needing 30 per cent of pretax income.

A townhouse takes about 34.5 per cent, a detached bungalow 42.5 per cent while a standard two-storey home required 48 per cent of pretax income.

Those costs rose everywhere in the country except in Alberta, where the cooling housing market saw costs of owning a home - such as servicing a mortgage, maintenance, property taxes - drop in all categories.

Also on Friday, the Canadian Real Estate Association released figures showing that MLS resale housing activity declined in February this year from January levels.

Seasonally adjusted MLS sales activity in the country's major markets edged down 6.4 per cent month-over-month to 26,588 units in February. The monthly decline largely reflected fewer sales in Toronto.

On the bright side, the RBC report says dropping mortgage rates, slower gains in house prices and income growth should improve affordability across most markets.

Vancouver was the most expensive market at about $650,000 for the standard two-storey home. That's defined to be the same benchmark at about a 2,200-square -foot home, two car garage in every region of the country.

Toronto comes next at $476,000, Calgary $462,000, Edmonton $354,000. In Atlantic Canada, the average price is $210,000.

In Alberta, where the housing market is cooling as scarcities in labour and supplies are addressed and people leave the province in search of jobs in other western provinces such as the oil fields in Saskatchewan, said Holt, the sales-to-listings' ratio has done an about-turn.

It "has gone from signalling very, very tight markets over the past couple of years to suddenly within the past six months or so markets with a fair amount of slack in them," he said.

In Calgary, for instance, the sales-to-listings ratio was 90-95 per cent at the peak in 2006, and then drifted down to about the 80 per cent mark in early 2007, said Holt. "Right now it stands just a hair over 40 per cent."

There's been a flood of new listings in the Calgary housing market and a curtailment of selling activity, he said. This has combined to lead to the fall in the sales-to-listings ratio. The story is similar in Edmonton.

"That's behind why we've seen price drops in an outright sense in the most recent quarter in those two markets," said Holt. "That helps out affordability."

As things stand now, said Holt, "it's a happy medium in terms of the balance of interests, because we think that sellers should retain most of the equity they built up over the last couple of years."

That also goes for people who have bought over the past few years and are just sitting on their homes, he said.

However, "it's a warning flag with just one quarter's worth of evidence so far, in what we're hoping is going to be a controlled cooling on their house prices."

So where are the most affordable places to live in Canada located?

"Classically it has always been Manitoba and the Atlantic provinces that have had the most affordable housing relative to local household incomes," said Holt.

The "most stressed points at the opposite end of the spectrum, without question ,are Vancouver, Victoria and British Columbia," he said

The B.C. market has broken all-time records for the fraction of household income going towards home ownership costs in the three out of the four segments that the bank tracks, said Holt.

The one exception, he said, "has been condos that are the safety valve in this housing cycle expansion."

In the months ahead, Alberta, Calgary and Edmonton are likely to see the biggest swings in affordability.

"The charts that we run in our publication even within just one quarter showed a fairly sizable drop in the affordability ratios for Calgary and Edmonton," said Holt.

In the third quarter of 2007, to buy a standard two storey home in Calgary took up 47 per cent of the median household income in that city. Then one quarter later it was down to just over 45 per cent, said Holt.

"That's a fairly sizable swing within just a quarter," said Holt. "And I wouldn't be surprised to see it go down to the 40 per cent range by the end of this year with combined income growth but also potential for further slippage in prices."

© The Canadian Press, 2008