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It's becoming more affordable to own a home, according to Royal Bank of Canada (RY-T), but the high cost of ownership will act as a drag on the market and keep a lid on future price increases.
In its quarterly housing affordability report, Royal Bank of Canada said the cost of home ownership moved lower for the first time in more than a year over the summer, as low mortgage rates and prices made it easier for buyers to pay for their homes.
But while homes were more affordable they were still more expensive than long-term averages in many markets, suggesting "greater than usual tensions exist for Canadian home buyers."
"These tensions are unlikely to derail demand for housing in the near term but will act as a restraint on growth in market activity going forward," said senior economist Robert Hogue.
It's the first time affordability has improved since mid-2009. The RBC Housing Affordability Measure shows the proportion of median pre-tax household income required to pay the principal and interest on a mortgage, property taxes and utilities. The figures assume a 25 percent down payment and a 25-year loan at a five-year fixed rate.
In the third quarter, a two-storey home ate up 46.3 percent of the household income of a typical Canadian family, down from 48.9 percent in the second quarter. The long-term average - going back to 1985 - is 43.3 percent.
The bank said the improvement could be short lived if mortgage rates begin to move higher to reflect an improving economy.
"Higher mortgage rates will be the dominant factor raising homeownership costs over the medium term, although increasing household income as the job situation continues to strengthen in Canada will provide some positive offset," he said. "We expect housing demand and supply to remain mostly in balance, setting the course for very modest home price increases."
From the report:
British Columbia: "In the third quarter of 2010, the RBC Housing Affordability Measures for British Columbia dropped between 1.8 and 5.0 percentage points, representing the largest declines since the first quarter of 2009. Still, all RBC Housing Affordability Measures remained significantly above long-term averages. Very poor affordability is likely to weigh on provincial housing demand in the period ahead."
Alberta: "The RBC Measures eased between 0.8 and 1.8 percentage points, more than reversing modest rises in the second quarter. Homeownership in Alberta is among the more affordable in Canada both in absolute terms and relative to its historical averages. Such a high degree of affordability augurs well for a strengthening in housing demand, once the provincial job market sustains more substantial gains."
Saskatchewan: "The RBC Affordability Measures dropped between 1.8 and 2.2 percentage points, which was the most since early 2009. While lower than they were a year ago, the measures are still modestly above their long-term average, thereby suggesting to us that current market conditions are stretching homebuyers' budgets to a degree. However, those budgets are likely to be boosted from a strong expected rebound in the provincial economy and, thus, family income this year and next."
Manitoba: "The RBC Measures fell between 0.9 and 2.3 percentage points, reversing one-half to three-quarters of the increase that occurred since the spring of 2009. Lower mortgage rates in the third quarter were particularly helpful in bringing down homeownership costs in the province although some price declines (particularly for two-storey homes) also contributed. Manitoba is one of only two provinces, alongside Alberta, where the measures for all housing types are currently below long-term averages, which will be a supportive factor for demand going forward."
Ontario: "RBC's Housing Affordability Measures fell between 1.3 and 2.4 percentage points, fully reversing the increase in the second quarter. Meanwhile, existing home sales ended their earlier precipitous slide by sustaining three straight gains (on a seasonally adjusted basis) from August to October. This recovery confirmed our earlier expectation that the slowdown in activity in the spring and summer largely reflected various transitory factors - including the HST and changes in mortgage lending rules - that brought demand forward to the start of this year. With the market now back in balance, the recent softness in home prices will likely prove to be a healthy recalibrating following a strong rally."
Quebec: "Following four consecutive increases, the RBC Measures for the province fell 1.4 to 1.8 percentage points (depending on the housing type). Still, the measures remain close to the pre-downturn peaks and above their long-term average, which will act to restrain growth in demand in the period ahead."
Atlantic: "The RBC Housing Affordability Measures moved down between 1.0 and 1.5 percentage points in the third quarter, with the levels returning to roughly where they were in mid to late-2009. Overall, housing affordability continues to be quite attractive in Atlantic Canada."