Housing affordability in Canada deteriorates marginally in the second quarter of 2013
The recent upswing in the Canadian housing market brought with it some mild erosion in housing affordability in the second quarter of 2013. Successive month-to-month advances in home resales and housing starts this spring seemingly marked an end to the cooling of activity that took place in the second half of last year and the early months of 2013, and tightened demand-supply conditions just enough to support a modest acceleration in quarterly home price increases. For single-family homes, the rate of property appreciation in the second quarter was sufficient to wear down their affordability a little. RBC’s housing affordability measures at the national level rose by 0.3 percentage points to 42.7% for the detached-bungalow benchmark and by 0.4 percentage points to 48.4% for two-storey homes. The appreciation of condominium apartments was comparatively more subdued, however, and had no effect on the corresponding RBC measure, which remained unchanged at 27.9%.
Diverging affordability conditions between single-family home and condo segments…
Last quarter’s divergence between the single-family home and condominium apartment segments was not a new development. Relatively tighter demand supply conditions for single-family homes in past years generally applied consistently more upward pressure on homeownership costs for single-family homes than for condos. The cumulative effects of these pressures have been affordability levels degrading below historical norms for bungalows and, especially, two-storey homes, while staying roughly on par for condominium apartments.
…reflecting the situation in Toronto, Montreal, and Vancouver
Such two-tiered affordability conditions nationally mainly reflect the situation in Canada’s three-largest markets. In Toronto, Montreal, and Vancouver, it has become somewhat of a stretch (compared to averages since the mid-1980s) for typical households to own a single-family home, while condo ownership remains much more within reach—although less so in Vancouver where condo affordability remains quite poor. Outside of these three markets, there are few signs elsewhere in Canada that affordability of any type of housing causes any undue stress for homebuyers at this stage.
Majority of local markets saw modest deterioration in affordability in the second quarter
In the second quarter of 2013, most local markets saw some deterioration in affordability, with Vancouver showing noticeable slippage in the bungalow and two-storey home segments (following four quarters of nearly continuous improvement). The erosion in other markets was generally modest (except perhaps in Edmonton where the RBC measure for bungalow jumped 1.8 percentage points). There were a few markets that experienced some improvement in affordability, however, including Montreal (all housing types), the Atlantic region (bungalows and condos), Manitoba (bungalows), and Ottawa and Calgary (condos).
Affordability not currently a hindrance for homebuyers…
With Canada’s housing market showing signs of regaining some strength in recent months—home resales increased by 6.4% in the second quarter— current affordability levels do not appear to get in the way of homebuyers becoming more active. We believe that the latest changes to National Housing Act Mortgage-backed Securities (NHA MBS) guarantees announced by the Canada Mortgage and Housing Corporation (CMHC) on August 1 will have a marginal effect on housing demand and that, barring another turn of the housing-policy screw by the federal government, home resales will stabilize near the recent not-too-hot, not-too-cold levels in the near term.
…but could become so if interest rates increase substantially
The main risk, as we have noted in past editions of Housing Trends and Affordability, is that manageable affordability levels may not persist if interest rates rise substantially. Exceptionally low mortgage rates have been the main factor preventing affordability from reaching dangerous levels in recent years, yet we believe that the likelihood of a surge in rates is slim at this stage. A more probable economic scenario is one of continued low interest rates in the short term; we expect the Bank of Canada to leave its overnight rate unchanged at 1% throughout the remainder of 2013 and to raise it only gradually starting in mid-2014. Although bond yields have already started to rise in recent months in anticipation of a reduction of monetary stimulus in the US, we expect future increases to be moderate in the face of what is likely to be a gradual pace of policy tightening by both the US and Canadian central banks.