While affordability is still improving, it appears that this ‘restorative phase of the affordability cycle is likely running out of steam,’ RBC finds

Virginia Galt – Globe and Mail

The cost of owning a home, as measured against household income, has fallen for the fifth consecutive quarter, Royal Bank of Canada economist Robert Hogue said in a report published Wednesday. “There has been some fairly significant improvement [in affordability], the most significant improvement since the early ‘90s recession. Home ownership is much closer to many families across Canada,” Mr. Hogue said.

But with interest rates levelling out and housing prices firming, “this restorative phase of the affordability cycle is likely running out of steam.” Here’s a look at his findings:

Affordability measures improved for all housing types in the second quarter

For a standard condominium, the affordability measure improved by 0.4% to 26.9%.

For detached bungalows, the affordability measure improved by 0.6% to 39.1%.

For standard townhouses, the affordability measure improved by 0.6% to 31.5%.

For standard two-storey homes, the affordability measure improved by 0.6% to 44.4%.

The lower the measure, the more affordable home ownership is. The higher the measure, the more costly.

For example, an affordability reading of 50% means that homeownership costs, including mortgage payments, utilities and property tax, take up 50% of a typical household’s monthly pre-tax income, the Royal Bank said.

The backdrop: Low mortgage rates were a boon to home owners

The modest second quarter improvement in affordability follows the biggest quarterly declines on record in the first three months of the year when a steep drop in mortgage rates and softening housing prices significantly lowered the cost of homeownership, the Royal Bank said in its report.

The latest improvement in affordability was widespread across the country and housing segments, Mr. Hogue reported. The only exception was in Vancouver’s condominium sector, where the affordability measure rose marginally for the first time since 2008.

Consumers have responded by jumping back into the housing market.

“The rebound in resales during the spring and early summer has been nothing short of stunning in many parts of the country…especially out West, where the activity had been so depressed early this year and late last year,” Mr. Hogue said in an interview.

The outlook: Costs creeping up again, but market will not deteriorate

“The two major contributors to the significant improvement during the past year or so – the decline in mortgage rates and the drift down in prices – appear to have hit turning points,” Mr. Hogue said.

“While those shifting trends will cease to drive affordability improvements, the next phase in the coming quarters will not necessarily be one of wholesale deterioration, with continued expected growth in household income providing some offset,” he said.

“More likely, the period ahead will be marked by a certain levelling off in affordability.”

However, this prediction is based on an assumption that sharp pickup in housing sales this spring and summer will also level off a bit, Mr. Hogue said.

“There’s been a rush back into the market in this spring and early summer and now things might stabilize a little bit. Prices might start to increase on a national basis, but on a fairly moderate pace,” he said.

“I think affordability will remain attractive in the short-term. We’ll see how the economy goes next year, which will dictate how much more of a rally there might be in the housing markets across the country.”

Will the market overheat to pre-bust levels?

Before the downturn, prices in many markets were out of line with what Canadians could afford. Prices have fallen back into line and this should continue in the short-term, at least, Mr. Hogue said.

“There are some anecdotes… of bidding wars in certain markets. However, they are probably less common that they were a couple of years ago,” he said.

“I wouldn’t want to generalize too much, but they certainly are a sign that confidence is back… and buyers are back.”

What happens when today’s low mortgages are up for renewal?

Mr. Hogue said the standard conventional five-year mortgage rate was 5.85 per cent in August, according to the Bank of Canada.

Economists from the Bank of Nova Scotia questioned, in a research note Wednesday, whether mortgages will be as affordable two or three years from now.

Furthermore, Scotiabank economists Derek Holt and Karen Cordes said, “lenders have been scrambling to get enough product to put into the federal government’s Insured Mortgage Purchase Program over the months, and that may have translated into excessively generous financing terms.”

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