Mortgages are eating up less Canadian household income thanks to historically low borrowing rates and a drop in house prices, a trend that is expected to continue in the near term, a new survey suggests.
The Royal Bank said the cost of owning a home went down in the last three months of 2008, after rising steadily since mid-2004.
The bank says the biggest factor affecting affordability was falling mortgage rates, which reduced the cost of borrowing, as well as lower house prices.
RBC economist Robert Hogue said lower house prices were mostly a factor in Calgary, Edmonton and Vancouver, which have seen prices driven up the most in recent years.
RBC said affordability improved 2.3 to 3.5 percentage points between the final quarters of 2007 and 2008, "with markets in Alberta and British Columbia showing more sizable repair (although this largely reflects the extent of the earlier impairment)."
The study showed that Vancouver remained the least affordable city, where it took 70.3 per cent of pre-tax family income to own a bungalow there, compared to 51.3 per cent in Toronto, 42.7 per cent in Calgary, 42.7 per cent in Ottawa and 39.4 per cent in Montreal.
Across Canada, RBC said affordability improved across all housing segments with detached bungalows accounting for an average of 43.7 per cent of pre-tax family income, the standard townhouse to 35.4 per cent, the standard condo to 30.1 per cent, and the standard two-story home to 50 per cent.
The bank study said rising family income in the quarter also contributed to rising affordability and that higher utilities and property taxes "have remained a modest undermining factor."
"Going forward, low mortgage rates and persisting downward pressure on housing prices will continue to help repair affordability, but slowing income growth will act as a restraint," the study says.
Hogue said in the first quarter of this year, house prices have fallen further, as have mortgage rates, which is good news for homeowners and new buyers.
"We are in the part of the cycle where affordability is going to continue to improve," Hogue said.
"Prices are probably going to become more of a primary factor in improving affordability across Canada."
The Bank of Canada has chopped the bank target overnight rate from 4.5 per cent to the current record 0.5 per cent in just over a year.
That has meant a drop in interest rates for some mortgage holders. For instance, a five-year variable mortgage negotiated a year ago (when banks were offering rates at or below prime) could be had for about 4.5 per cent - as interest rates have fallen, some of those now sit as low as two per cent. On a $250,000 mortgage, amortized over 25 years, that's a monthly saving of about $330.
Peter Kinch, of the Peter Kinch Mortgage Team in the Vancouver area, said clients are finding they can not only afford a more expensive home in today's market, but they can also put more down on the purchase.
People who already own property, perhaps as an investment and rent it out, are also making larger profits as a result of the lower interest rates, Kinch said.
Cameron Nolan, a real estate broker with Judy Marsales Real Estate Ltd. in the Hamilton-Burlington region of Ontario, said he is also seeing signs of greater affordability in his market.
"Generally speaking, capable buyers have a higher degree of affordability today than they did six-to-eight months ago," Nolan said.
"Mortgage rates are one reason, and prices have moderated."
The affordability survey came a day after the Canadian Real Estate Association said the number of existing homes sold in March was down from a year ago, but continued an upward trend that began in February.
The association, which represents real-estate brokerage firms, also reported that the national average price for homes fell again in March compared with the same month last year.
Sales of existing homes listed with the industry's MLS service totalled 35,225 units across Canada in March. That's 13.5 per cent below actual sales in March 2008, but CREA said it's the smallest year-over-year decline in six months.
The association also noted that, on a seasonally adjusted basis, March sales were seven per cent higher than in February, which was 10.3 per cent above January.
The association said the number of transactions in March was 18 per cent higher than in January, when activity was the lowest in a decade.
The average house price in Canada fell to just under $289,000 - down 7.7 per cent from March 2008 - also the smallest year-to-year decline in six months.
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