Gains in affordability attributed to drop in mortgage interest rates, according to report
Canada’s housing became more affordable in the second quarter of 2014 thanks to a decline in mortgage rates, according to the latest Housing Trends and Affordability Report issued by RBC Economics Research.
“It was more affordable to own a home in virtually all provincial and major local markets across Canada in Quarter 2, and in the face of solid price gains no less,” said Craig Wright, senior vice-president and chief economist, RBC. “We had anticipated a rebound in activity from earlier this year when the harsher than normal winter weather took hold, but the biggest drop in fixed mortgage rates in almost four years and resulting improvement in affordability also gave the Canadian housing market a boost of extra energy.”
The main story in Manitoba, according to the report, is the growing supply of homes for sale. New listings — on a steady upward trend for some time — jumped in the latest quarter to levels almost 14 per cent above where they were a year ago.
“The increase coincided with a wave of completions of new housing units in the Winnipeg area (between 85 and 95 per cent of the Manitoba market) in the past year. It also far exceeded a 2.6 per cent increase in resales,” reported RBC. “This the latest such divergence that resulted in a notable loosening of demand-supply conditions since the end of 2012 and, more recently, limited price advancements.”
In May and June, Canada’s home resales picked up and contributed to a 9.4 per cent seasonally-adjusted advance in the second quarter, which was the strongest quarterly gain in nearly four years. RBC said that unadjusted for seasonal factors, resales in the second quarter were the second-best ever on record.
The RBC report indicated that sellers also came out from the sidelines with a surge in new listings by eight per cent in the second quarter, following three consecutive quarterly declines. Greater supply of homes for sale helped to unclog markets, such as Toronto, where a lack of “quality” listings earlier this year stifled activity.
“Stats rolling in suggest that the upward momentum in Canada’s housing market is being sustained and further, that a sharp slowdown is not imminent,” said Wright. “In the coming year, however, we do expect the market will gear down its resale levels and that the rate of price increases will soften.”
But, according to the report, Canada’s historically low interest rates are not sustainable and it’s expected that longer term rates will begin to rise later this year in anticipation of the Bank of Canada’s move to tighten policy in 2015. RBC reported that rising rates would erode housing affordability across Canada and weigh on home buyer demand, although continued growth in household income would somewhat offset the impact.
“We remain of the view that any rise in rates will be gradual and unlikely to unhinge either overall affordability levels or the market — we expect a cooling in activity, not a crash,” added Wright.
The new third quarter 2014 Housing Market Outlook from Canada Mortgage and Housing Co-operation (CMHC) makes the same assessment, calling for a soft landing in the housing market.
The RBC housing affordability measure captures the proportion of pre-tax household income that would be needed to service the costs of owning a specified category of home at current market values (a fall in the measure represents an improvement in affordability).
During the second quarter of 2014, affordability measures at the national level fell by 0.9 percentage points to 48.0 per cent for two-storey homes, by 0.6 percentage points to 42.5 per cent for detached bungalows and by 0.4 percentage points to 27.4 per cent for condominium apartments.
Manitoba’s affordability level remains close to historic norms, according to RBC, and fell between 0.5 and 1.5 percentage points in the second quarter.
Vancouver continues to experience sky-high prices and the poorest affordability levels in the country. Toronto had deteriorating trends in affordability with levels becoming increasingly strained, predominantly for single-family homes. Virtually all other markets across Canada are close to historical averages which indicates that negative affordability-related pressures should not impact home buyer demand at this stage.