By Robert Hogue
Housing affordability greatly improved in the first quarter of this year; RBC’s affordability measures for all housing types recorded some of their biggest quarterly declines on record (the lower the measure, the more affordable homeownership is). At the national level, the improvement ranged from 2.8 percentage points for standard condominiums to five percentage points for two-storey homes. At the major city level, the decline was as large as 8.6 percentage points (for Vancouver’s two-storey homes). This third consecutive quarterly improvement in affordability has reversed much — although not all — of the deterioration that occurred during 2006-2007 when Canada’s housing markets reached a boiling point. In most areas of the country, RBC’s affordability measures have now returned to, or near, long-term averages, which is consistent with more solid market fundamentals.
Aggressive policy action to shore up confidence in financial markets and jump start the economy is behind much of the improvement in affordability in the past year. The Bank of Canada’s rate cutting campaign and the federal government’s active support of the mortgage securities market have resulted in meaningfully reducing the cost of homeownership. The decline was accelerated by softening housing prices, especially in the western part of the country, which retraced some of the large gains made during the boom. Monthly payments in the first quarter on a typical detached bungalow (based on the going market value) had fallen by close to 17% from a year earlier in Canada. Among the major cities, the decline was as much as 24% in Calgary, 22% in Vancouver and 20% in Edmonton.
Such hefty “discounts” on the cost of homeownership provided powerful incentives for buyers to step back into the game. Home resale activity, based on Canadian Real Estate Association data, had plunged during the final quarter of last year and early months of this year as the violent bout of financial flu knocked the broad economy off its feet. With the turmoil in financial markets subsiding (at least partially) and the flow of credit picking up, buyers have indeed returned to the market. Home resale activity has rallied impressively since late winter, erasing more than one-half of the previous decline at the national level (more in some cities). Even more remarkable has been how widespread across all major Canadian cities the rebound has been – every single one of them has enjoyed a resurgence. Property values — which had come under heavy pressure — have recently shown signs of stabilizing in many parts of the country.
While housing markets appear to be generally on the mend in Canada, the road to full recovery still has obstacles. The rise in some mortgage rates in June is a reminder that the sizable improvement in affordability attributable to lower rates is likely behind us and, with home prices stabilizing or perhaps beginning to rise in some areas, further improvement depends on greater gains in family income, which should be supported by an improving economy in the second half of this year.
Robert Hogue, Senior Economist/Économiste principal, RBC, (416) 974-6192, robert.hogue@rbc.com
RBC Economic Digest, July 2009
