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Real estate is seen in downtown Vancouver on Oct. 16, 2012.

Rafal Gerszak/The Globe and Mail

Owning a house became slightly more affordable in Canada during the second half of 2012, but that's mostly due to rock-bottom mortgage rates, RBC Economics says in a report to be released Monday.

The sharp drop in house sales that occurred during the final six months of the year led to some small month-over-month declines in house prices in many cities. And, as sales fell, banks made further small cuts to their already-low mortgage rates. Those two factors helped to take a tiny bite out of the cost of home ownership during the final three months of the year, for the second quarter in a row, RBC says.

The report comes as economists debate the health of the housing market and whether the moves that Ottawa made to tighten the market last summer will continue to have an impact this year.

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On Friday, BMO Economics said that the latest data suggests falling mortgage rates and rising incomes are offsetting the effects of high house prices in most markets. That report said that affordability is not a "major problem" in most of the country, including Toronto's much-watched condo market, and that it should not become one even when rates hit more normal levels.

"If interest rates remain low, income continues to rise, and prices stabilize this year – as we anticipate – fears of a deep housing correction should recede," BMO senior economist Sal Guatieri wrote in that report. But he urged policy makers to "remain vigilant," pointing to a number of major exceptions, namely the markets for detached homes in Vancouver, Toronto and Victoria, each of which are vulnerable to a significant correction if incomes fall or rates rise.

Finance Minister Jim Flaherty made changes to the mortgage insurance rules in July, after growing concerned that house prices and household debt levels were rising too fast. Those changes, which made it somewhat harder to obtain a mortgage, included cutting the maximum length of an insured mortgage to 25 years from 30 years.

"We expect overall housing market activity to remain subdued this year," says RBC chief economist Craig Wright. "That said, we believe that there is scope for some mild strengthening from recent activity levels, as the negative effects of the mortgage insurance rule changes, implemented in July, 2012, gradually dissipate."

While affordability is improving, RBC is warning that many families could be priced out of the market if interest rates were to jump.

"Exceptionally low interest rates have been the key factor keeping home affordability from reaching dangerous levels in recent years," says Mr. Wright. "Residential property values are elevated in Canada and, for many households, ownership remains accessible only because of rock-bottom mortgage rates."

BMO's report suggests that, nationwide, Canada's housing market is overvalued by about 10 per cent.

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RBC's housing affordability measure calculates the proportion of pre-tax household income that is required to service the costs of a house at current market prices. Both detached bungalows and condos saw the measure fall by 0.2 percentage points (to 42.1 per cent and 28 per cent respectively), while the measure for a two-storey home fell by 0.3 percentage points to 47.8 per cent.

All of the measures remain slightly higher than their historical averages, but the national figures are being propped up by "extremely poor affordability conditions" in the Vancouver area, RBC says.

Roughly 82.2 per cent of pre-tax income was required to service the cost of a detached bungalow in Vancouver during the final quarter of 2012, down 2.6 percentage points from the prior quarter, RBC says. Toronto's measure was 52.8 per cent, down 0.4 percentage points; Montreal was 39.3 per cent, down 0.9 percentage points; Ottawa 38.8 per cent, down 0.5 percentage points; and Edmonton 30.7 per cent, down 0.1 percentage points. In Calgary, where the market is on an upswing, the measure was 38.1 per cent, up 0.2 percentage points.

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