Ontario, Quebec housing affordability continues to erode: RBC study

Affordability in Toronto sharpest quarterly deterioration since 1994

RBC release - After some improvements earlier in the year, Ontario's housing affordability deteriorated sharply in the latest quarter, according to a new housing report issued today by RBC Economics.

"A combination of higher house prices, rising mortgage rates and increasing utility costs have forced affordability to deteriorate dramatically across all housing segments," said Derek Holt, assistant chief economist, RBC.

"Despite the sudden drop, if we take a historical look back at the affordability numbers for Ontario, the cost to own a home still remains comfortably below levels witnessed in the late 1980s."

RBC's Housing Affordability report, which measures the proportion of pre-tax household income needed to service the costs of owning a home, increased across the board in Ontario to 37% for the benchmark detached bungalow, 43% for the standard two storey home, 30% for the standard townhouse and 28% for the standard condo.

According to the report, the housing cycle has been altered by the impact of extended amortization products. For example, mortgage payments for an average condo run at roughly $1,058 per month (under standard assumptions).

Extending the mortgage five years shaves off roughly $70 from the monthly payment; an additional five-year extension shaves a further $45 off; and extending the mortgage a full 15 years to a 40-year term, leads to a further $30 drop in monthly payments.

Affordability for all four housing segments eroded dramatically in the second quarter in Toronto, the sharpest deterioration since 1994. Similar to the rest of the province, sizeable gains in house prices, higher mortgage rates and higher utilities contributed to the decline. The report noted that while hot pockets in the Toronto core are driving double-digit price growth and bidding wars, the broader Toronto area continues to see healthy and fairly balanced housing market conditions.

"A more significant challenge and bigger risk to Toronto's affordability is the combination of potentially higher property taxes and a jump in property value assessment levels, as the current freeze on assessments will be lifted in 2008," said Holt.

Following three quarters of fairly stable conditions, Ottawa's housing market also felt the nationwide hit, as affordability dropped across all housing segments there. According to the report, it was the sharpest decline for the region in three years. On a more positive note, while the pace of price growth has picked up modestly in 2007, price gains continue to run in line with household income gains. Slightly tighter demand will help support healthy price gains through the remainder of 2007.

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Quebec's housing affordability further erodes, says RBC Economics

RBC release - Quebec's housing affordability deteriorated across all segments in the most recent quarter despite modest price gains, according to the latest Housing Affordability report released today by RBC Economics.

"While there was only a modest increase in house prices this past quarter, climbing mortgage rates, utilities and taxes eroded Quebec's housing affordability," said Derek Holt, assistant chief economist, RBC. "However, the province's decent economic fundamentals still support housing markets with job growth running at a healthy two% rate this year and incomes keeping pace with gains in house prices."

According to the RBC report, Quebec's housing market has softened gradually over the past two years. The orderly slowdown has seen the annual pace of house price gains stabilize between four and five%. The sales-to-listings ratio has averaged just under 0.6% so far this year, pointing to a market that is roughly balancing its supply and demand conditions. Holt noted that the arrival of extended amortization mortgages has
changed the dynamics of the housing market. The new found ability to extend amortization up to forty-year mortgages temporarily offsets affordability
pressures by rolling the clock back to late 2005 and early 2006 affordability
conditions.

The RBC Housing Affordability report, which measures the proportion of pre-tax household income needed to service the costs of owning a detached bungalow, was about 36% of income. The amount of median pre-tax income required to purchase a condo in Quebec was about 29%. For a standard townhouse, the measure stood at 31.5% and for a two-storey home at 44%.

In Montreal, housing affordability deteriorated across every housing segment, due to higher house prices, mortgage rates, utilities and property taxes. However, among the big cities across the country, price gains in Montreal's housing market are among the weakest at about three to 4% for the past two years.

"Despite weak spots in the local economy, Montreal incomes are growing at a solid pace, thanks to a solid job market," added Holt.

The Housing Affordability measure, 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 measure, the more costly it is to afford a home. For example, an Affordability reading of 50% means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50% of a typical household's monthly pre-tax income.

Also included in the report are housing affordability conditions for Quebec City and a broader sampling of smaller cities across the country. For these smaller cities, RBC has used a narrower measure of housing affordability that only takes mortgage payments relative to income into account. RBC's Affordability measure for a detached bungalow in Canada's largest cities is as follows: Vancouver 71%, Toronto 45%, Calgary 45%, Montreal 36% and Ottawa 31%.


See also:
BC home affordability deteriorates, again: RBC study
Ontario, Quebec housing affordability continues to erode: RBC study
Alberta is the second most expensive province for housing: RBC study

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