Canada's Housing Affordability Mildly Deteriorates
Canada's housing affordability mildly deteriorated in the fourth quarter of 2005 due to relatively weak growth in household income, according to the latest Housing Affordability Index released today by RBC Economics.
"The erosion in Canada's housing affordability was largely attributed to slower growth in household income compared to the rest of the year. This was unable to offset increases in mortgage rates, house prices and utilities costs," said Derek Holt, assistant chief economist, RBC. "Although borrowing rates may continue to increase, we expect rates will remain stimulative to the economy for this year and next, while job markets remain strong."
The RBC Affordability Index measures the proportion of pre-tax household income needed to service the costs of owning a home. The most affordable housing type is the standard condo, with an index of 25.7 per cent. A standard townhouse is next at 30.1 per cent followed by a detached bungalow at 37 per cent. A standard two-storey home remains the least affordable housing type with an index reading of 43 per cent.
Affordability has deteriorated, but RBC notes that the pace of price appreciation has cooled in most parts of the country for almost all types of housing over the past year with the exception of British Columbia, Alberta, and Manitoba, which continue to experience double-digit annual price gains.
"The mild deterioration in housing affordability is likely to lead to a moderately slower pace of demand for new and existing homes in 2006 and 2007, but it will be a controlled slowdown in the housing markets as both new supply and demand are expected to cool simultaneously," added Holt.
According to the report, expected growth in home renovation spending, critical to the construction industry, will partly offset weaker new home construction. Canada's renovation spending has grown by over 50 per cent since 2000, to over $26 billion in 2005. RBC forecasts that renovation spending will remain strong as homes built in the 1980s boom will continue to enter their prime renovation years.
"The erosion in Canada's housing affordability was largely attributed to slower growth in household income compared to the rest of the year. This was unable to offset increases in mortgage rates, house prices and utilities costs," said Derek Holt, assistant chief economist, RBC. "Although borrowing rates may continue to increase, we expect rates will remain stimulative to the economy for this year and next, while job markets remain strong."
The RBC Affordability Index measures the proportion of pre-tax household income needed to service the costs of owning a home. The most affordable housing type is the standard condo, with an index of 25.7 per cent. A standard townhouse is next at 30.1 per cent followed by a detached bungalow at 37 per cent. A standard two-storey home remains the least affordable housing type with an index reading of 43 per cent.
Affordability has deteriorated, but RBC notes that the pace of price appreciation has cooled in most parts of the country for almost all types of housing over the past year with the exception of British Columbia, Alberta, and Manitoba, which continue to experience double-digit annual price gains.
"The mild deterioration in housing affordability is likely to lead to a moderately slower pace of demand for new and existing homes in 2006 and 2007, but it will be a controlled slowdown in the housing markets as both new supply and demand are expected to cool simultaneously," added Holt.
According to the report, expected growth in home renovation spending, critical to the construction industry, will partly offset weaker new home construction. Canada's renovation spending has grown by over 50 per cent since 2000, to over $26 billion in 2005. RBC forecasts that renovation spending will remain strong as homes built in the 1980s boom will continue to enter their prime renovation years.
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