The positive news about Canadian home sales and price increases has a bit of a downside as affordability deteriorated slightly in the second quarter, according to a Royal Bank research note released Aug. 27.
But by and large, the decrease in affordability is not worrisome.
Single-family home (detached bungalows and two-storey units) affordability got a little worse while condo affordability remain unchanged.
Royal Bank’s affordability measures provide an idea of what typical portion of pre-tax household income is needed to bear all costs associated with a mortgage for different types of standard homes at going market prices—the higher the measure, the less affordable the home.
Regionally speaking, outside of Toronto, Montreal, and Vancouver “there are few signs elsewhere in Canada that affordability of any type of housing causes any undue stress for homebuyers at this stage,” the report said.
In Canada’s three largest cities, “it has become somewhat of a stretch [compared to averages since the mid-1980s] for typical households to own a single-family home,” the report continued. However, condos in Toronto and Montreal remain realistically affordable.
Vancouver is in a different league and the recent pick-up in home prices doesn’t help. British Columbia is just simply expensive. For example, while the Canada-wide affordability measure for detached bungalows is 42.7 percent in the second quarter of 2013, for Vancouver it sits at 82.1 percent. For Toronto, it is 54.5 percent.
For condos, the Canada-wide measure is 27.9 percent, but for Vancouver it is 40.7 percent and for Toronto, it is 34.0 percent.
Affordability could take an even bigger hit if interest rates start increasing rapidly. While this risk is admittedly slim for the time being, the groundwork for rate hikes is being laid south of the border with the impending withdrawal of monetary stimulus. The upcoming U.S. Federal Reserve’s policy meeting on Sept. 18 is of paramount importance for the path of future interest rates.
Of course, the exogenous factor remains the federal government. It is unknown whether Finance Minister Jim Flaherty is done trying to contain the housing market, although given the more tepid outlook it’s not inconceivable that he’ll simply remain an interested spectator for the time being.
Demographics Favor Condos
The Conference Board of Canada said in a report and interview on CBC’s “Lang and O’Leary Exchange” on Aug. 28 that a crash in the condo market is unlikely, mainly due to a growing and aging population.
Conference Board director Mario Lefebvre described the condo market as “a bit more immune because of demographic fundamentals as compared to single family markets.”
As people age they tend to downsize, he said, thus moving out of larger homes and into more manageable condos.
But Lefebvre also explained that with about a quarter of the Toronto and Vancouver population between the ages of 25 and 39, a decent percentage of the population of those cities will have a natural tendency to look to condos as a first home.
Going back to last September when Statistics Canada released its population estimates, its report showed that from 1992 to 2012, the median age in Canada increased by 6.4 years (to 40).
People aged 65 years and older increased by 3.3 percent to 14.9 percent in that 20-year span. According to the report: “The proportion of seniors will grow rapidly in the coming years as baby boomers reach the age of 65.”
Many industry experts, including Royal Bank chief economist Craig Wright, expect housing prices to soften going forward, so we may see some improvements in affordability in the near future before the pick-up in interest rates begins.