Mon, 10 Apr 06
Canadians spent a larger share of their income on housing in the fourth quarter of 2005, as high home prices and utility costs squeezed affordability to its lowest level in a decade, according to a report by the Royal Bank of Canada (RBC).
RBC Financial Group's latest housing affordability index measures the proportion of pre-tax household income spent on housing costs. The report found that after ten years of generally "excellent" affordability conditions, last year ended on a "mildly sour note" with housing affordability deteriorating across the country.
RBC attributes much of this drop in affordability to a slower rate of growth in household income. "This was unable to offset increases in mortgage rates, house prices and utilities costs," said Derek Holt, the Royal Bank's assistant chief economist.
As the east falters, the west powers on
Affordability was worst in the western cities of Vancouver and Calgary, where house prices rose rapidly on the back of rapid growth in the mineral-rich economies of Alberta and British Columbia which outpaced the Canadian average.
This boom in the western provinces was in stark contrast to a gloomier picture in the rest of the country. Ontario saw new home construction decline as construction workers relocated to Alberta. Last year, housing starts in the province dropped 7.4 per cent while residential building permits slowed for the first time in a decade.
Holt commented: "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."
RBC expects demand for new and existing homes outside Alberta and British Columbia to slow moderately over the next two years due to declining affordability.
Things will get worse before they get better
Benjamin Tal, senior economist at CIBC World Markets, told the Toronto Star that he expects affordability will get worse before it gets better.
"Income growth in Canada is starting to accelerate, wages are rising," Tal said. "But the increase in house prices has been faster. Add to it higher interest rates, and the overall size of mortgages is rising, so affordability is going down."
But towards the end of the year Tal expects affordability will stabilize as interest rates stop rising, house prices level off, and incomes are stronger than expected. "So, I think affordability will not be much worse a year from now. It might even be better," he told the Toronto Star.
The housing market's soft landing will also be supported by growth in home renovation spending, the RBC report said. Canada's renovation spending has risen by over 50 per cent since 2000 bringing the total to more than $26 billion in 2005.
The RBC report suggests that condominiums were the most affordable Canadian housing type during the fourth quarter of 2005, with an index of 25.7 per cent. A standard townhouse was next at 30.1 per cent, followed by a detached bungalow at 37 per cent.
A two-storey home remains the least affordable type with an index reading of 43 per cent.
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