DSC_2524 Photo: Dustin Quasar/Flickr

While home prices keep going up in many parts of the country, Canada’s housing market actually became more affordable in the second quarter of 2014, thanks, according to the Royal Bank’s affordability report, to the country’s historically low mortgage rates.

“It was more affordable to own a home in virtually all provincial and major local markets across Canada in Q2, and in the face of solid price gains no less,” said RBC chief economist Craig Wright in a release.

“We had anticipated a rebound in activity from earlier this year when the harsher than normal winter weather took hold, but the biggest drop in fixed mortgage rates in almost four years and resulting improvement in affordability also gave the Canadian housing market a boost of extra energy,” Wright continued.

RBC says resale volume from May to June rose 9.4 per cent seasonally-adjusted — the strongest quarterly gain in almost four years. Not accounting for seasonal factors, it was second-best period for the quarter ever on record.

The jump in activity can be attributed in part to an eight per cent increase in new listings, which followed three consecutive quarterly declines.

“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 Wright. “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.”

Will affordability continue to improve?

The report says that Canada’s seriously low interest rates are not sustainable and expects that longer term rates will begin to rise later this year in anticipation of the Bank of Canada’s move to tighten policy in 2015. RBC says rising rates will erode housing affordability across Canada and weigh on homebuyer demand — though continued growth in household income would somewhat offset the impact.

“We remain of the view that any rise rates will be gradual and unlikely to unhinge either overall affordability levels or the market — we expect a cooling in activity, not a crash,” added Wright.

The hard numbers

To gauge affordability, the RBC index measures the percentage of pre-tax household income that a homeowner needs to commit in order to be able to afford a home at current market prices, so a drop in percentage actually means an increase in affordability.

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 condos.

Canada housing affodability

The affordability index in Canada’s four largest markets


One noteworthy aspect of higher-priced housing markets is that affordability benefits disproportionately from a fall in mortgage rates relative to lower priced markets. Such was the case in the Vancouver-area housing market where  affordability improved (modestly) across the board despite prices recording some of the faster increases among Canada’s major markets. RBC’s affordability measure for bungalows decreased 0.3 percentage points to 81.8 per cent, by 1.3 percentage points to 85 per cent for two-storey homes and condos declined for the third straight quarter by 0.8 percentage points to 39 per cent.

Vancouver housing affodability


A surge in home resales in the second quarter confirmed, again, that Calgary’s housing market is soaring. Resales set a new high for any Q2 on record, rising almost 29 per cent above the 10-year average. RBC says that this isn’t surprising considering how strong housing demand is being supported by a booming provincial economy, rapid population growth and attractive affordability — which became even more attractive in the second quarter of the year. RBC’s measures edged lower for all housing types, moving down 1.0 percentage points to 33.9 per cent for two-storey homes, down 0.8 percentage points to 33.6 per cent for bungalows and down 0.5 percentage points to 19.8 per cent for condos.

Calgary housing affodability


RBC notes that Toronto was the only major Canadian housing market to show some deterioration in affordability during the second quarter of the year. Indeed, affordability still appears to be strained, particularly when it comes to the single-family home segment. RBC’s measure for condos edged higher by 0.1 percentage points to 34.3 per cent. The other measures stayed unchanged at 65.3 per cent for two-storey homes and eased by 0.2 percentage points to 55.9 per cent for bungalows.

Toronto housing affodability


The number of homes sold in Montreal from May to June was the lowest second quarter showing since 2000, coming in more than 17 per cent below the 10-year average. RBC says this muted demand came at a time when more homes were available for sale, particularly condos. The good news is that there was greater affordability relief for the Montreal market than any other major Canadian city. RBC’s affordability measures fell noticeably across all housing types, dropping between 1.4 and 2.6 percentage points. The bank says such sizeable improvement “might sow the seeds for a revival in activity during the second half of this year.”

Montreal housing affodability

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