Red-hot home resale activity and strong price rises across Canada made it more difficult to own a home for a typical household in the fourth quarter of 2009; however,
concerns that housing affordability would come off the rails did not materialize.
RBC’s affordability measures generally eroded only modestly in the closing months of 2009. At the national level, the measures increased between 0.1 and 0.3 percentage points, depending on the housing type (a rise in the measure represents
a deterioration in affordability). These fairly small increases contrasted with much larger ones registered in the third quarter, when a rise in mortgage rates exacerbated the effect of strong housing price increases. Except for detached bungalows, the pace of price appreciation was steady or moderated slightly in the fourth quarter of 2009. The effect on affordability was further tempered by a small decline in mortgage rates and continued gains in household income.
There were notably divergent swings at the provincial level. Affordability deteriorated significantly in British Columbia (particularly for bungalows and townhouses) and Quebec (two-storey homes and bungalows). Levels in British Columbia are now causing some worries. In Manitoba, most RBC measures rose moderately. At the same time, there was a further, substantial improvement in Saskatchewan and, to a lesser extent, Alberta (for most housing types). The Atlantic region also had some modest improvement. In Ontario, affordability was either flat or eroded marginally.
While the broad affordability picture at the national level did not fall apart in the fourth quarter of 2009, it, nonetheless, has become abundantly clear that it is once again set on an eroding path. One reason is the effect of the uptrend in prices, which is likely to continue to raise the bar on homeownership costs. Prices are bid higher due to very tight supply of available properties relative to demand – the latter fuelled by exceptionally low interest rates. Brisk demand is likely to be sustained in the near term by anticipation of an interest rate hiking campaign by the Bank of Canada – to start mid-year according to our forecast – enticing buyers to jump into the game to lock in lower rates. In Ontario and British Columbia, demand for housing should also receive a further boost this spring from buyers rushing in ‘to beat’ the implementation of the HST on July 1, 2010 – which will increase the transaction costs associated with a home purchase. Most affected will be new, high-priced housing, where the tax will apply to the purchase price and not be fully offset by rebates.
Potentially acting to restrain near-term demand will be the changes, which are aimed at preventing a market bubble from forming in Canada, announced in mid-February by federal Finance Minister, Jim Flaherty. These changes set stricter qualifying criteria for variable rate mortgages, lower upper limits on mortgage refinancing and higher down payment requirements for properties purchased as investments.
While the precise market effect is unknown at this point, the new rules (kicking in on April 19, 2010) could exert some moderating influence on activity, at least at the margin.
concerns that housing affordability would come off the rails did not materialize.
RBC’s affordability measures generally eroded only modestly in the closing months of 2009. At the national level, the measures increased between 0.1 and 0.3 percentage points, depending on the housing type (a rise in the measure represents
a deterioration in affordability). These fairly small increases contrasted with much larger ones registered in the third quarter, when a rise in mortgage rates exacerbated the effect of strong housing price increases. Except for detached bungalows, the pace of price appreciation was steady or moderated slightly in the fourth quarter of 2009. The effect on affordability was further tempered by a small decline in mortgage rates and continued gains in household income.
There were notably divergent swings at the provincial level. Affordability deteriorated significantly in British Columbia (particularly for bungalows and townhouses) and Quebec (two-storey homes and bungalows). Levels in British Columbia are now causing some worries. In Manitoba, most RBC measures rose moderately. At the same time, there was a further, substantial improvement in Saskatchewan and, to a lesser extent, Alberta (for most housing types). The Atlantic region also had some modest improvement. In Ontario, affordability was either flat or eroded marginally.
While the broad affordability picture at the national level did not fall apart in the fourth quarter of 2009, it, nonetheless, has become abundantly clear that it is once again set on an eroding path. One reason is the effect of the uptrend in prices, which is likely to continue to raise the bar on homeownership costs. Prices are bid higher due to very tight supply of available properties relative to demand – the latter fuelled by exceptionally low interest rates. Brisk demand is likely to be sustained in the near term by anticipation of an interest rate hiking campaign by the Bank of Canada – to start mid-year according to our forecast – enticing buyers to jump into the game to lock in lower rates. In Ontario and British Columbia, demand for housing should also receive a further boost this spring from buyers rushing in ‘to beat’ the implementation of the HST on July 1, 2010 – which will increase the transaction costs associated with a home purchase. Most affected will be new, high-priced housing, where the tax will apply to the purchase price and not be fully offset by rebates.
Potentially acting to restrain near-term demand will be the changes, which are aimed at preventing a market bubble from forming in Canada, announced in mid-February by federal Finance Minister, Jim Flaherty. These changes set stricter qualifying criteria for variable rate mortgages, lower upper limits on mortgage refinancing and higher down payment requirements for properties purchased as investments.
While the precise market effect is unknown at this point, the new rules (kicking in on April 19, 2010) could exert some moderating influence on activity, at least at the margin.