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A significant correction in the Canadian housing market in the short term is unlikely, says a new report.
Housing affordability is largely unchanged in first three months of 2013 along with mortgage rates, home prices and household incomes, says Royal Bank of Canada’s Economics Research department.
Home resale volumes have fallen 13% on last year, although much of the decline took place after last July’s changes to government-insured mortgage insurance rules.
Exceptionally low mortgage rates have been the chief factor in keeping homeownership costs relatively affordable, according to the Housing Trends and Affordability Report.
Craig Wright, senior vice-president and chief economist, RBC, says, “The Canadian housing market cooled significantly in the past year; however, there is mounting evidence that activity is no longer weakening.
“A significant nationwide price correction does not appear to be imminent so long as affordability remains outside of the danger zone.”
The RBC report calculates the proportion of pre-tax household income needed to service the costs of owning a specified category of home at going market values. A rise represents lower affordability.
From January to March the measure for detached bungalows climbed 0.3% to 42.5%, still under the 44.5% reached in previous Canadian market downturns when prices fell by more than 5% across the market.
The standard two-storey home index was at 48% and condominium apartment at 28.1% – both unchanged.
“While affordability levels are manageable at this point, we’d be humming a very different tune if interest rates were to suddenly rise substantially. Fortunately, the likelihood of a surge in rates is slim at this stage.
“We believe that the more probable scenario in Canada is one of low interest rates over the next two years; we expect the Bank of Canada to begin gradually raising the overnight rate in mid-2014.”
When interest rates eventually rise, it will be because the Canadian economy is on stronger footing, with rises in household income to offset any negative impact on affordability.
Home prices have generally held up so far in 2013, thanks to predominantly balanced markets in Canada.
RBC expects market activity to remain subdued this year, but there may be a “mild strengthening” as the effects of the government changes decline.
Vancouver continues to be the least affordable market in the country by far, with Toronto and Montreal showing signs of affordability issues, particularly with single-family homes.
RBC’s housing affordability measure for the benchmark detached bungalow in Canada’s largest cities is Vancouver 82.3% (up 0.1% from the previous quarter); Toronto 53.8% (up 0.8%); Montreal (pictured) 40.1% (up 0.6%); Ottawa 39.1% (up 0.1%); Calgary 38.7% (up 0.8%); Edmonton 30.4% (down 0.2%).
Affordability across British Columbia improved slightly and fell 0.4% for bungalows and by 1.3% for two-storey homes, but is still the highest in Canada.
In Alberta, the affordability index rose 0.2%, but was offset by high household incomes.
Following a big all in the fourth quarter of 2012, Saskatchewan’s affordability saw the largest improvement with measures falling 1.7% for two-storey homes, 1% for bungalows and 0.3% for condominiums.
Manitoba’s affordability levels rose slightly, up 0.8% for bungalows, 0.4% for condominiums and 0.2% for two-storey homes.
In Ontario, measures for both bungalows and two-storey homes rose by 0.4%, while the measure for condominiums remained unchanged.
Quebec bungalow affordability also rose 0.4%, with two-storey homes up 0.1% and condos falling 0.6%.
The index for Atlantic Canada rose between 0.4% and 0.6%.
The RBC Housing Affordability Measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow (a reasonable property benchmark for the housing market in Canada) at market value.