Housing affordability hits levels not seen in 5 years

Housing affordability hits levels not seen in 5 years

But experts warn that it won't last

By John Morrissy, Canwest News ServiceSeptember 10, 2009


Owning a home hasn't been this cheap since the last housing boom got going in late 2005, but buyers beware: The party won't last.
So says Royal Bank, which issued a report Wednesday showing the affordability of housing in Canada improved again in the second quarter -- after posting the biggest quarterly improvement on record in the first quarter -- marking 15 straight months of gains.
For potential home buyers, that means falling mortgage rates and housing prices have considerably whittled down the portion of their pre-tax household income they would have to spend on owning a home.
"The attractiveness of owning a home has improved considerably over the past year and going forward it's probably not going to get much better," said the report's author, RBC senior economist Robert Hogue.
"Anyone still sitting on the fence right now might want to consider moving forward over the coming months."
According to the most recent data, the percentage of household income required to pay the costs of RBC's benchmark home, a detached bungalow, declined 0.6 percentage points to 39.1% in the second quarter.
RBC's data shows the average cost of such home is now 2.8% cheaper than a year ago, at $297,000, while posted rates for a five-year fixed mortgage are running near historical lows of 5.85%.
In Calgary, home of some of the greatest gains in real estate prices during the housing boom, falling values have now pushed affordability all the way back to 35.7%. But in Vancouver, affordability has only fallen to 63.4%, despite similarly dramatic price declines.
The report's findings add to the mounting evidence of a remarkable turnaround in the Canadian housing market, built upon a strong resurgence in resales and now spreading into new home construction.
Data released Wednesday by Canada Mortgage and Housing Corporation showed new home construction surged by a greater-than-expected 12.1% in August, rising to an annualized pace of 150,400 starts from 134,200 the month before.
"This was undoubtedly a strong report, and it indicates that some momentum is perhaps beginning to build in the new homes market, thereby complementing the dramatic turnaround seen in the existing homes market recently," said TD Securities economics strategist Millan Mulraine.
While Hogue is not forecasting a sudden reversal in the affordability of homes, he did caution that this phase of the cycle is likely running out of steam.
"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 reached turning points."
Hogue doesn't expect incomes, the other part of the affordability equation, to rise markedly in the months head, nor does he expect interest rates to spike from current levels.
If his forecast holds true, he expects demand from buyers and supply of home listings to find a new balance.