Home Ownership Becoming More Affordable Despite Rising Debt

Excerpts
Home ownership becoming more affordable despite rising debt

By Julian Beltrame | Wed Mar 7 2012
Comment (3)
Recommend (0)

OTTAWA—Despite ongoing concerns about household debt, home ownership is becoming more affordable in Canada, not less, says new research by the Royal Bank.

RBC’s latest report says home affordability actually improved in the final months of 2011 for the second consecutive quarter, thanks to softening house prices and income gains.

Owning a home in Canada now takes up as much of pre-tax income as it did a year ago, even though household indebtedness has continued to rise and is now at a record high 153 per cent of disposable income.

Ownership even became more affordable in the ultra-expensive Vancouver market, although it remains the dearest place in Canada to own a home.

“The improvement in affordability was modest for the most part, but still significant enough to dial back the deterioration that impacted the market in spring last year,” said RBC chief economist Craig Wright in a release issued Wednesday morning.

“At this point, housing in Canada is essentially as affordable as it was a year ago, and only slightly less affordable on average than it has been over the long term.”

The study shows affordability rates vary widely depending on the market. Vancouver’s rate is down by 4.6 points to 86 per cent, by far the least affordable market in Canada. Next highest is Toronto at 52.2 per cent.

Other ratings were Ottawa (40.9), Montreal (40.1) Calgary (36.7) and Edmonton (32.8).

RBC defines affordability as the proportion of pre-tax household income needed to service the costs of owning as specific type of home. A ranking of 50 per cent means that a household was spending half its pre-tax income on mortgage, utilities and property taxes.

Earlier this week, Finance Minister Jim Flaherty warned Canadians again about taking on too much debt and said he was particularly concerned about the condo market, which has been particularly robust in Vancouver and Toronto.

Acknowledging that there had been recent moderation in housing, Flaherty nonetheless said high debt was a worry.

“I again encourage Canadians to be careful in the amount of debt they take on in terms of residential mortgages because (interest) rates will go up some day,” he said.

Bank of Canada governor Mark Carney has issued similar cautions, while such global institutions as the International Monetary Fund have estimated Canada’s market to be 10 per cent overvalued.

TD Bank economist Derek Burleton said it was time for Flaherty to rein in borrowers by reducing the maximum amortization period to 25 years from 30, which he said would tamper housing but not enough to cause damage. Flaherty, who has tightened rules on three occasions since 2006, gave no hints he was preparing to move a fourth time.

In a forecast issued Monday, the Canadian Real Estate Association said it expects the average price of a home will decline by 1.1 per cent this year to $359,100, while resales rises a tiny 0.3 per cent.

The RBC report shows that affordability has improved in almost all provinces and cities in the last quarter of 2011.

Manitoba was the only province to experience a slight deterioration in affordability, while Quebec’s index remained unchanged.

A very important point about the RBC report...
The RBC Affordability Index is based on current home prices and interest rates, but it also assumes a 20% down-payment. The vast majority of first-time home buyers put down much less than 20% (5% is most common), which means their mortgages -- and thus the fraction of their income going to housing costs -- is MUCH larger than the RBC Affordability Index assumes.
Mar 7, 2012 10:17 AM