Rising house prices made home-ownership slightly less affordable in Canada during the second quarter of this year, when buyers returned to the market after a lengthy slump.
Royal Bank of Canada's housing affordability index, which looks at the proportion of household income required to keep up with the cost of owning a home, rose by 0.3 percentage points to 42.7 per cent for detached bungalows, and by 0.4 percentage points to 48.4 per cent for two-storey homes, according to a report to be released Tuesday.
RBC chief economist Craig Wright said it has become a bit of a stretch for a typical household to own a bungalow or two-storey house in Toronto, Montreal and Vancouver.
However, the index was unchanged for condos during the latest quarter owing in part to an abundance of new construction in larger cities like Toronto, which has hindered price gains.
House affordability would be strained further if mortgage rates rise significantly. Toronto-Dominion Bank economists, who estimate that home prices nationally are overvalued by 8 per cent, said in a recent report that they believe affordability is at it's weakest point since about 2000 because of the sharp rise in home prices in recent years. "If five-year interest rates were at more normal levels of around 7 per cent, housing would be unaffordable to the average Canadian household," the report said.
Rates on five-year mortgages have risen by more than 60 basis points this summer, as banks' funding costs have increased in tandem with five-year bond yields.
RBC, the country's largest mortgage lender, said in Tuesday's report that "exceptionally low mortgage rates have been the main factor preventing affordability from reaching dangerous levels in recent years." It expects the Bank of Canada won't begin raising its key overnight rate until the middle of next year, and will do so gradually, which should mitigate risks of serious deterioration in affordability levels.
RBC economist Robert Hogue noted that the slight deterioration in affordability during the last quarter centred on single-family homes. "We saw some price increases pretty much across the board in Canada, but more so in the larger cities," he said.
The bank uses price data from Royal LePage, which said that the average price of detached bungalows and two-storey homes each increased by 2.7 per cent during the second quarter, to $386,547 and $419,614 respectively. It said condo prices nationally rose 1.2 per cent, to $248,750.
While house prices are rising, they are doing so at a slower rate than they historically have. A report by TD Economics on Monday noted that while Canadians still have high debt levels, they are starting to save more – in part because they have no choice. "Rising values of homes and other personal assets had been doing much of the 'saving' for Canadians over the past decade," it said. "But, with Canadian equity markets being sub-par since the recession and, over the past year, home price gains having cooled, actively saving out of income has had to take up the slack."