Canada's Condominium Magazine
The affordability of housing in Canada improved a little in the second quarter of 2014, RBC Economics reports, mainly due to lower mortgage rates. The RBC Housing Trends and Affordability report says that housing became more affordable in “virtually all” major markets, even though prices continue to rise. Buyers were very active in the second quarter, with the resale market picking up 9.4 per cent. It was the strongest Q2 in nearly four years, one of the best on record.
“Stats rolling in suggest that the upward momentum in Canada’s housing market is being sustained and further, that a sharp slowdown is not imminent,” said Craig Wright, chief economist at RBC. “In the coming year however, we do expect the market will gear down its resale levels and that the rate of price increases will soften.”
Toronto and Vancouver are the two notable exceptions to the improving affordability trend. Whereas virtually all other markets are close to historical norms, Vancouver continues to cope with “sky-high” prices and Toronto experienced “steadily eroding” affordability, mainly in the single-family category. Homebuyers in Ontario aren’t much bothered by the real estate market’s “moderately strained” affordability, which is mainly driven by Toronto. There, a 10.2 per cent rise in new listings helped resales “surge” to the second-highest Q2 level ever.
The RBC affordability index is based, sensibly, on the ownership cost as a percentage of household income. It assumes a down payment of 25 per cent, and a 25-year mortgage with a five-year fixed rate. It describes the cost of making the monthly mortgage payments and includes property taxes and utilities. What matters, using this method, is whether the mortgage borrower can afford to make the monthly payments, as that is what the bank is most concerned with.
By this measure, a standard two-storey home in Toronto would consume two-thirds (65.3 per cent) of a household’s income. A condo would require 34.3 per cent of that income.
The condo is the one housing option that remains affordable in every market, which explains, the RBC report notes, its popularity “in the past many years.” Nationally, the RBC affordability measure for condos was 27.4 in the second quarter (see chart below: chart source RBC).
While low mortgage rates are certainly helping home buyers, they are not sustainable. RBC expects to see them begin to rise “later this year.” The Bank of Canada is expected to “tighten policy” in 2015. The rise in rates, however will be gradual, and “unlikely to unhinge either overall affordability levels or the market,” according to Craig Wright.
During the second quarter of 2014, affordability measures at the national level fell by 0.9 percentage points to 48.0 per cent for two-storey homes, by 0.6 percentage points to 42.5 per cent for detached bungalows and by 0.4 percentage points to 27.4 per cent for condominium apartments.
RBC Housing Trends and Affordability, August 2014
The preoccupation with housing affordability is more or less universal. In the UK, the measure of affordability used is the price-to-income ratio, which looks at the cost of the home compared to the buyer’s income. The ideal according to that method is 3, where the home costs three times the income of the buyer. Now analysts talk of a crisis in Britain, as housing in most cities has become highly unaffordable by that measure. The cost of a home in Oxford, the least affordable English city, comes in at more than eleven times the average household income.
When affordability in Britain is looked at in terms of mortgage payments as a percentage of income, however, as measured in the RBC index, it does not look nearly as grim: the average British household paid just 16 per cent of income to carry a mortgage in 2013, the lowest in twenty years.
The caution in Britain, as in Canada, is that when mortgages rates inevitably rise, so will home owners’ costs.
International comparisons are interesting. Hong Kong, for example, has the least affordable housing in the world, according to the most recent Demographia Housing Affordability Survey. Hong Kong’s rating is 14.9, while Canada’s is 3.9, the United States’ 3.4, and the UK’s 4.9. Canada’s housing by this standard is “moderately unaffordable.” A rank of 3 and under is considered affordable.
These numbers represent the ratio between the country’s median house price and the median annual household income, a measure called the “median multiple.” The World Bank says that the median multiple is the most important measure of housing affordability.