Housing affordability is improving in the Greater Toronto Area, thanks to lower mortgage rates and softening price appreciation.
According to a Royal Bank of Canada report to be released Monday after four consecutive quarters of steep decline, housing affordability gained traction in the third quarter of 2010, thanks to bottoming mortgage rates and a slowing demand.
“The improvement in affordability has reduced some of the stress that had been mounting in housing markets during the past year,” said Robert Hogue, senior economist with RBC.
Housing affordability measures improved for the first time since the second quarter of 2009, when sales and prices of homes started to surge in the Toronto market coming out of the recession.
Many of those sales were buyers rushing in to avoid a new Harmonized Sales Tax and to buy before more stringent mortgage regulations. This led to fears that the market was in an unsustainable bubble.
“Although triggering a fair amount of anxiety while it unfolded, the Toronto area market’s return to earth this spring was, in retrospect, a mostly benign affair,” said Hogue. “The fears were that the payback for the clearly unsustainable record high levels of existing home sales at the start of this year would be an all out rout.”
So far that hasn’t happened, as the Toronto market seems to be in for a generally soft landing.
However, affordability is not expected to improve moving into next year with the spectre of increased interest rates, says Hogue.
“The recent decline in mortgage rates, however, is not expected to be sustained much beyond the coming months of this year,” said Houge.
RBC expects the Bank of Canada to start hiking rates in the second quarter of 2011.
“Higher mortgage rates will be the dominant factor raising homeownership costs over the medium term,” said RBC. “We expect housing demand and supply to remain mostly in balance.”
Some of the increases in mortgage rates will be offset by increasing household income as a mitigating factor, says RBC.
The price of an average two-storey home was $554,700 in the third quarter. But it would take a household income of $120,400 to afford that.
Some banks raised five-year fixed mortgage rates slightly last week by a quarter percentage point, as turmoil in Europe spilled over into the bond markets. However, variable rates can still be had as low as 2.15 per cent from some lenders. A five year fixed rate is going as low as 3.45 per cent.
The RBC affordability index for a standard two-storey home has fallen to at 56.1, down significantly from the 60 points recorded in the second quarter of the year. (the lower the number, the more affordable the home)
A rise in the index means homes are less affordable. The study measures the proportion of pre-tax median income needed to service the costs of owning a home such as mortgage, utilities and property taxes. A measure of 56.1 means that it takes more than half of average pre-tax income in Ontario to pay the monthly costs of owning a home.
The long term average since 1985 has been 53.4, meaning that affordability is getting closer to a normal range.
Nationally, the RBC index is slightly above long term averages, suggesting that “some greater than usual tensions persist for Canadian homebuyers,” according to the bank.
“These tensions are unlikely to derail demand for housing in the near term, but will act as a restraint on growth and market activity going forward.”
The Toronto market, meanwhile, looks reasonable when compared to Vancouver. There it takes 78.1 per cent of pre-tax income to afford a two-storey home. But that’s down already by 4.7 points from the earlier quarter.
An average two-storey home in Vancouver goes for $766,300. To afford that, you need to be earning $149,400 annually.
Taken from MoneyVille