Sunday, April 09, 2006

Ontario's Housing Market Shows Signs of Slowing Down

Ontario's housing market is showing signs of a controlled cooling down, according to the latest Housing Affordability Index issued today by RBC Economics.

"Affordability deteriorated across every major housing class in the fourth quarter," said Derek Holt, assistant chief economist, RBC. "Slower household income growth, higher mortgage rates on the heels of higher bond yields, and a jump in utility costs are the drivers behind the decline. While condos continue to remain the cheapest option for Ontario homeowners, they also experienced the sharpest erosion to affordability compared to the other house classes."

RBC's Housing Affordability Index for Ontario, which measures the proportion of pre-tax household income needed to service the costs of owning a home, increased for the benchmark detached bungalow to 35.5 per cent for the fourth quarter of 2005. Other classes also saw deteriorations with a standard two-storey home requiring about 41.8 per cent of household income, a standard townhouse absorbing 29.9 per cent and a standard condo needing 25.7 per cent of household income.

In 2005, housing starts in Ontario pulled back 7.4 per cent, residential permits dropped for the first time in 10 years by 3.3 per cent, and for the first time since 2000 resale volumes weakened. The price for a detached bungalow rose 5.4 per cent while a two storey home jumped 4.1 per cent compared to a year ago. On a more positive note for prospective buyers, price growth has slowed to the three-to-five per cent range for the various house classes, instead of the eight-to-ten per cent price increases witnessed over the past several years.

"Migration and housing starts tend to move closely together in Ontario. Labour-hungry western provinces, most notably Alberta and British Columbia, continue to pull workers from other provinces, putting downward pressure on new home construction in Ontario, which still remains at elevated levels," noted Holt.

According to the report, housing affordability weakened in Toronto for the first time after three consecutive quarters of solid improvement. The slower pace of household income growth, combined with higher mortgage rates and utility costs, contributed to the deterioration. Townhouses experienced the sharpest erosion of affordability, which had the strongest price growth for the quarter.

"Even though indicators suggest that the housing market is still hot in Toronto, we expect to see gradual cooling over 2006-07. Supply and demand should continue to soften simultaneously without causing abrupt price shocks," said Holt.

In keeping with the rest of the province, Ottawa also saw affordability deteriorate across all housing classes. The cost for a detached bungalow jumped more than eight per cent compared to a year ago, showing the biggest deterioration in affordability. Despite these fluctuations, Ottawa still maintains one of the most stable housing markets in the country.

The decline in housing affordability spanned all provinces and all major cities. At the provincial level, the largest deteriorations were in British Columbia followed by Manitoba and Alberta. The worst hit cities were Vancouver and Calgary.

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


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