RBC has released their latest housing affordability report for Q4 2010.
Housing affordability improved modestly in Q4 2011 on the back of lowering fixed (qualifying) interest rates.
“Housing Affordability Measures fell in the majority of provinces in the latest quarter (meaning housing became more affordable -ed.). Only the standard two-storey benchmark became less affordable in Ontario and Quebec, as did the standard condominium apartment in Quebec and the Atlantic region. The most significant improvement occurred in Alberta, where falling home prices once more contributed to lowering the bar for homeownership.”
The carrying costs of the standard detatched home in BC continues to consume between 60% and 70% of average family income, while in Toronto it consumes between 40% and 50%. The affordability winner remained Thunder Bay where carrying costs ran at 10% of income.
The improvement in affordability in the last two quarters is likely to be short lived. Earlier this month, Canadian financial institutions raised posted mortgage rates for the first time since November 2010—by 0.25% to 5.44% in the case of the five-year fixed term.
Given our expectation that the Bank of Canada will resume its rate hike campaign this spring (adding 100 basis points to the overnight rate this year and a further 150 basis points in 2012), borrowing costs are set to climb further still in Canada in the next two years. We believe that this will be the dominant factor that will cause housing affordability generally to erode across the country going forward, yet the magnitude of this deterioration is unlikely to derail the housing market.
Housing affordability continues to appear reasonably healthy until one considers current interest rates and the inevitable upward direction of rates over time. When compared to rents, it still makes sense to rent space rather than money in most large centres, though that certainly is not the case across the entire country.