Dropping mortgage rates and softer house prices pushed housing affordability higher in the third quarter, the Royal Bank of Canada said in its quarterly housing report Monday.
The bank’s affordability index measures how much pre-tax income is required to cover all the costs associated with owning a home. Broadly, the index monitors the costs of condos, detached bungalows and two-storey homes. It was the first time that home affordability has improved in four quarters.
The quarterly report said the index dropped at the national level by between 1.4 and 2.5 percentage points from the second quarter (meaning affordability improved) depending on the type of property. Such a range is still above the long-term average. Bungalow costs fell by 2.4 percentage points between the second and third quarters, to 40.4 per cent of pretax income. That’s still 0.3 percentage points above the third quarter of 2009, when Canada was just beginning to come out of a major recession, and above the 15-year average of 39 per cent.
The situation was similar with standard two-storey homes, which gobbled up 46.3 per cent of pre-tax income — 2.5 percentage points less than in the second quarter of 2010 but up 0.3 percentage point from the third quarter of 2009. The average measure for two-storey homes, since RBC began compiling the numbers in 1985, has been 43.3 per cent.
National home prices have retreated modestly in recent months, as market conditions cooled considerably during the spring and summer from their earlier boil, the report found. “While this represented a decline from the second quarter, home prices were still 5.8 per cent to 6.8 per cent higher year-over-year.”
Condos remained the most affordable type of housing track, requiring 27.8 per cent of pre-tax income to cover mortgages, taxes and utilities and one percentage point above the long-term average of 26.8 per cent. However, the improvement from the second quarter of 2010 was only 1.4 per cent and remained 0.1 percentage point above the third quarter of 2009.
RBC says all provinces had improvements in housing affordability during the third quarter, especially British Columbia. However, the cost of home ownership in British Columbia remained high by historical standards — following increases that began in the first quarter of 2009. A detached bungalow in British Columbia consumed 59 per cent of pre-tax income, while two-storey homes ate up 67.5 per cent of income and condos required 32.9 per cent of pre-tax income — all above the national average.
Alberta and Manitoba are the only two provinces where the RBC Measures stand below their long-term average in all housing categories, an indication, the bank says, that there is little stress in these markets.