Housing affordability drops to 18-year low

Globe and Mail Update
March 14, 2008 at 9:42 AM EDT
 
source: http://www.reportonbusiness.com/servlet/story/RTGAM.20080314.wafford0314/BNStory/Business/home

Housing affordability drops to 18-year low
by ROMA LUCIW

Housing affordability across Canada has dropped to its lowest level since the country slid into a recession in 1990, although Canadian households are still shouldering far less debt than Americans, says an RBC report released Friday.

A comparison of Canadian and U.S. household finances shows that while Americans are still modestly richer, they are much more heavily leveraged and further in debt — with less liquidity — than Canadians. The high debt levels makes Americans “more vulnerable to ongoing credit market turmoil and risks towards house prices,” said Derek Holt, assistant chief economist at the Royal Bank of Canada and the author of the bank's housing affordability report.

At the same time, the steep depreciation of the U.S. greenback over the last six years has left Canadians relatively richer by increasing the value of what the now stronger loonie can buy on world markets, Mr. Holt said.

RBC's affordability measure looks at the proportion of pre-tax household income needed to own a home in Canada. It found that the long-term and sustained rise in prices, combined with a strong economic growth and a solid job market, caused housing affordability nationwide to close last year at its worst point in 18 years.

In 1990, soaring interest rates and a recession capped housing affordability, Mr. Holt said. “Today, a long upward trend in house prices driven by sounder macroeconomic fundamentals, like job growth, is primarily responsible.”

Affordability in all four housing classes eroded across the country in the latest quarter, with the exception of the cooling Alberta market, which experienced a drop in average price.

On a national basis, the standard condo is still the most affordable type of housing for most Canadians, requiring about 30 per cent of pre-tax household income, the RBC report said. A standard townhouse was next at 34.5 per cent, followed by a detached bungalow at 42.5 per cent. A standard two-storey home is the least affordable housing type, at 48 per cent.

The RBC report foresees some relief in 2008, saying that the popular five-year mortgage rate will drop a further 75 basis points by year-end. “Going forward, falling mortgage rates, weakening house price gains and decent income growth should all lead to improved affordability across most markets.”