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Canadian Homeowners Are Feeling The Pinch Of Rising Prices, Mortgage Rates

An article from the Financial Post

Higher prices and an increase in mortgage rates have made home affordability more of a problem for the average Canadian family, says a new report from the Royal Bank of Canada.

RBC’s latest research on the portion of average household income needed to maintain a home shows that affordability deteriorated over the summer, the second consecutive drop in as many quarters.

The level of deterioration differs from region to region and between types of homes, but for the average bungalow the affordability measure rose 0.7 of a percentage point to 43.3% nationally in the third quarter, after a 0.3-percentage-point gain in the second quarter.

That means the average household would have needed to devote 43.3% of its pre-tax income to service the cost of owning a bungalow at current market values, including mortgage payments, utilities and municipal taxes. The higher the rating, the less affordable a home is to any particular family.

For two-storey homes, the affordability reading rose 0.6 or a percentage point to 48.9% in the July-September period.

Owning a condominium was the most affordable option, with a cost measure of 28% of pre-tax income, and the most stable, up just 0.1 of a percentage point from the previous period.

RBC chief economist Craig Wright attributed the deterioration in affordability to higher prices and what has been a tightening mortgage market reacting to an expectation of firming interest rates.

“By the third quarter, strong resale activity across Canada heated up home prices a few degrees,” he explained. “At the same time, Canadian bond yields rose in tandem with those in the U.S., climbing in anticipation of the Fed (U.S. Federal Reserve) tapering its bond buying program.”

The most recent Canadian Real Estate Association report pegged the average resale price of a home at $391,820 in October, 8.5% more than a year earlier.

Wright said recent months has seen a divergence in prices for Canadian homes, with price gains for bungalows and two-storey structures outpacing condominiums.

Affordability deteriorated in many of the large markets, but while the average number is only moderately higher than historic norms, RBC notes there is a wide disparity in the associated costs depending on markets, with some appearing out of reach of the average family.

The report says the biggest risk to maintaining manageable affordability levels would be a sharp rise in interest rates, but many analysts believe that is unlikely to occur as long as global economic growth remains moderate and inflation pressures soft.

The RBC says it does not expect the Bank of Canada to start hiking rates until sometime in 2015 as bond yields, the main driver of fixed mortgage rates, are projected to drift only “gently” upwards in the next year or so.