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Owning Home Least Affordable Since 1990

Housing in Canada deteriorated in 2007 to its least affordable level since 1990, the year the real estate bubble burst. And cracks may be showing in the seemingly bulletproof housing market, with once hot Alberta bucking the trend with a rapid cooling of housing prices, says a report released yesterday by RBC Economics.

"Alberta's housing market is on watch for further negative developments," RBC economist Derek Hold said in his quarterly report.  "This also marks the start of what we fear could become a trend."

In three months, bungalow prices in Alberta fell by more than 7 percent, compared with the third quarter.  Standard two-storey homes fell by 4.3 percent, compared with three months earlier, condos fell by 5.3 percent and townhomes dropped 4 percent, the bank said.

While prices have not slipped in Ontario, economists are worried that the housing market in this province could follow the lead of the beleaguered U.S.  market.  RBC's affordability measures show income needed to service the costs of owning a home deteriorated across all four classes last quarter.

One big reason was that by the end of 2007, the annual pace of income growth was the slowest among provinces, which was one of the factors that led to the deterioration in affordability, the bank report said.

"The province may well be teetering on the brink of recession and by a number of measures is nowhere near as resilient as first thought." Holt wrote.  "The impact of a weaker economy, slower job growth and lower income gains should restrain housing activity in 2008."

In Toronto, it takes 47.3 percent of pre-tax income to afford a bench mark detached bungalow, up from 46.3 percent in the third quarter.  The higher the figure, the harder it is to afford a home.  A measure of 50 percent, for example, means it takes half of pre-tax income to afford ownership costs including mortgage payments, utilities and property taxes.

RBC defines a detached bungalow as 1,200 square feet, while a standard condo is 900 square feet.

Back in 1990, "soaring interest rates and a recession sparked most of the trouble," Holt said.  "Today, a long upward trend in house prices driven by sounder macroeconomic fundamentals like job growth, is primarily responsible for the deterioration in affordability."

RBC said Toronto's downtown core "remains tight," pushing prices higher and eroding affordability.  However, with a larger supply of condominiums coming to market over the next two years, RBC said, prices in the city should "start to level off."

Toronto's prices pale in comparison to Vancouver, where it takes 73.8 percent of pre-tax income to afford a similar bungalow.

Compared with Americans, Canadians are better able to withstand a downturn, since they are not as highly leveraged as American families, Holt wrote.

The strong loonie is also a plus.

"The sharp depreciation in the U.S.  dollar over the past six years has made Canadians relatively richer over time by raising the relative value of what their wealth will buy in world markets compared to Americans."

Six years ago, when the Canadian dollar bottomed out at 62 cents (U.S.), Canadian household net worth was much lower than Americans'.

Some relief may come by the end of this year, as Holt predicted five year mortgage rates will drop 75 basis points if the Bank of Canada reacts to a cooling economy by dropping key overnight rates.

Meanwhile, a cold February meant house resales also fell by 6.4 percent to a seasonally adjusted 25,588 units last month, according to a separate report released yesterday by the Canadian Real Estate Association.  The association said sales activity will fall short of last year's record with new listings to increase, a more balanced market and smaller price gains throughout Canada.

"With the further slide in February, Canadian home sales are now firmly below year-ago levels," BMO Nesbitt Burns deputy chief economist Doug Porter said yesterday.  "This is another sign the Great White North's housing boom is grinding to a finish."

Tony Wong – Business Reporter
Toronto Star
Posted on Tuesday, April 15, 2008 at 06:06PM by Registered CommenterElaine | Comments1 Comment

Reader Comments (1)

Canadian real estate market shows a bit different behavior than US real estate market. There are more reasons why is it so. First, I should mention than Canadian economy condition is better than in the United States. Toronto real estate market showed decline in number of sold houses. On the other hand prices of homes are still growing. It is a great example of contradiction.
April 27, 2008 | Unregistered CommenterToronto real estate

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