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Home Affordability Improves For Canadians

Written by Posted On Tuesday, 03 July 2001 00:00

The same economic pressures that have sent the Toronto Stock Exchange lurching into negative territory have created the first significant improvement in housing affordability since 1996, according to a recent Royal Bank study. Although our federal rate setter, the Bank of Canada, has not mirrored US interest rate cuts, it has consistently lowered rates, a trend paralleled by Canadian mortgage lenders. The Royal Bank reports that five-year mortgage rates averaged 7 percent in the January-to-May period compared to 8.15 percent in the fourth quarter of last year.

According to the Royal Bank's 2001 Housing Affordability Index Report , lower mortgage rates and improved affordability boosted housing market activity in Canada in the first quarter of 2001, more than offsetting the negative impact of the current economic slowdown.

Sales of existing homes increased 5.7 percent to an annualized level of 352,000 units. If this level continues throughout the year, 2001 would surpass 1999's record by about 5 percent. Housing starts were also up strongly in the first quarter.

"We continue to expect housing market activity in Canada to stay healthy despite the economic slowdown and the still-uncertain short-term employment outlook," said Royal Bank economist Carlos Leitao. "Housing affordability remains well below the potentially troublesome level of 35 percent of pre-tax household income. Household incomes are still rising and there is still a healthy degree of pent-up demand in this country, unlike in the United States."

The Housing Affordability Index, which measures the proportion of pre-tax household income needed to service the costs of owning a home in Canada, declined from an average of 32.9 percent in the second half of 2000 to 32 percent in the first quarter and an estimated 29.8 percent in the second quarter of this year. The index is based on ownership costs for an average detached bungalow, a typical purchase for first-time buyers.

The higher the Index, the more difficult it is to afford a house or condominium. For example, an affordability index of 50 percent means that home ownership costs, including mortgage payments, utilities and property taxes, would account for 50 percent of a typical household's pre-tax income.

In the first quarter, with the Index at 32 percent, the cost of owning a bungalow in Canada totalled $1,218 a month (principal, interest, taxes and utilities), 1.8 percent lower than in the final quarter of 2000. On a regional basis, this varied from a low of $900 a month in Atlantic Canada (or 27.3 percent of household income) to a high of $1,500 in British Columbia, or 39.2 percent of household income.

Average house prices in Canada increased by a modest 3.3 percent in the first quarter of 2001 to $161,500 up from $157,580 in the same period last year. The report attributes increases in household incomes with offsetting the impact of this modest increase in average house prices. Affordability across Canada showed some variation in the first quarter of 2001:

  • British Columbia experienced the strongest improvement in housing affordability in Canada reaching 39.2 percent, down two and one-half percentage points from last year. Vancouver dropped to 46.7 percent, down from 50.5 percent, with a second quarter estimate in the range of 43 percent -- the city's best.

  • Ontario's affordability improved to 30.8 percent in the first quarter and is estimated to have dropped below 30 percent in the second quarter due to a moderation in house price increases and lower interest rates. Toronto hit 38.6 percent, with a second quarter estimate of 35.8 percent -- a level last seen in 1995-96.

  • Housing affordability improved slightly in Quebec after a record deterioration last year. At 31 percent this translates into a monthly payment of $1,020. The average price of a Quebec detached bungalow reached a record $127,000 in the first quarter of 2001. In Montreal, the Index was 32.1 percent, virtually unchanged from a year earlier.

  • Alberta has the second lowest affordability index in Canada at 29.8 percent despite experiencing rapid average house price increases (17 percent increase from 1997 compared to an 8.5 increase for the country as a whole).

Affordability did not improve significantly in the rest of Canada.

But reasonable affordability, fuelled by rising household incomes, and pent-up demand will only continue to boost the housing market as long as consumer confidence holds and that depends on where employment is headed in 2001. Fasten your seat belts, we may be in for a bumpy ride.

For more articles by P.J. Wade, please press here .

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PJ Wade

Futurist and Achievement Strategist PJ WADE is “The Catalyst”—intent on Challenging The Best to Become Even Better. A dynamic speaker and author of 8 books and more than 1800 published articles, PJ concentrates on the knowledge, insight, communication prowess, and special decision-making skills essential for professionals and their clients who are determined to thrive in the 21st-Century vortex of change.

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