As 2003 rolls to a strong real estate close, Canadian financial forecasters predict affordability will decline in 2004.

Canadian housing markets staged an impressive rally in the third quarter inspired by solid affordability rates, according to the latest Housing Affordability Index released recently by Royal Bank of Canada (RBC) Economics. Existing home sales are now on track for yet another record high while housing starts are expected to reach their best level since 1989.

RBC's Housing Affordability Index -- which measures the proportion of pre-tax household income needed to cover the costs of owning a home -- rose just slightly to 31.8 per cent in the third quarter of 2003 from 31.3 per cent in the previous quarter. This translates into $1,260 in average monthly ownership costs in Canada, with financing rates based on the average posted five-year mortgage rate.

"Going forward, we will continue to see a mild erosion in affordability since bond yields which influence five-year mortgage rates are expected to rise," said Carl Gomez, RBC economist. "As it is unlikely that the Bank of Canada will lift its overnight rate any time soon, shorter term mortgage rates should remain a relatively supportive influence on housing markets for most of next year."

The Housing Affordability Index, which RBC has compiled since 1985, is based on the costs of owning a detached bungalow, which they consider a typical target home for first-time buyers. The higher the index, the more difficult it is to afford a house. For example, an Affordability Index of 50 per cent means that home ownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household's pre-tax income. Traditionally, shelter costs were considered affordable at about 30 per cent of gross family income.

The Atlantic region remains the most affordable in Canada with an Affordability Index of 26.3 per cent, a mild drop from 26.1 per cent in the previous quarter, which translates into a monthly payment of $914 -- 1.3 per cent higher than the period before -- and an average price of $132,632 for an average detached bungalow. Relatively low mortgage rates and corresponding strength in affordability should keep Atlantic housing demand healthy in the months ahead.

Other than Alberta where the Affordability Index improved slightly to 27.3 per cent from 27.6 per cent in the previous quarter of 2003, affordability declined across Canada according to the RBC report on the second quarter of 2003:

Published: November 25, 2003

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