Canada's Housing Bubble

Sep 29, 2010 Scott Simpson, Vancouver Sun

Housing affordability lacking, crippling household income

Vancouver - RBC economist Robert Hogue is raising a “red flag” about housing affordability in Vancouver.

The bank’s quarterly report on housing trends and affordability, released Monday, said Vancouver is one of a handful of Canadian markets where the share of household income taken up by home ownership costs “is at worrisome levels.”

RBC said the proportion of median pre-tax household income required to service the cost of a mortgage on an existing housing unit exceeds 70 per cent for both two--storey homes and detached bungalows. A standard condo consumes about 43 per cent of income, according to RBC.

“In Vancouver, Canada’s most expensive market, RBC housing affordability measures are very close to their all-time high, which points to significant underlying stress and raises a red flag,” Hogue said in the report. “Very poor affordability is likely to restrain demand in the period ahead.”

Ottawa, Montreal and markets in Saskatchewan also showed poor affordability relative to historic trends, while the situation in all other major Canadian housing markets and regions was “very close” to long term averages. The report also raised the possibility that Vancouver’s housing market could be overheated, but shied away from suggesting a price retreat. “Generally we have dismissed the case of housing market bubbles in Canada, but the situation in Vancouver is probably the closest to one in the country. While the Vancouver market is clearly vulnerable to a price correction, this does not imply that a collapse is imminent because supply [both in the existing and new home sides of the market] is well contained at this point.”

Hogue reported that across B.C., home prices in the second quarter showed either “very weak price gains or small declines” depending on housing type — but affordability was an issue, regardless of whether the home was a single family unit or a condo.

Cameron Muir, chief economist for the B.C. Real Estate Association, noted that RBC’s numbers reflect activity through the second quarter of 2010, and that the situation eased somewhat over the summer. “We’ve seen prices edge lower over the summer months as well as we’ve seen downward pressure on five-year mortgage rates,” Muir said. “Your posted mortgage rate is much lower today than it was during the second quarter of the year. In fact it is close to what it was during the height of the financial crisis.”

On Monday, mortgage broker Invis said its best five-year rate was 3.59 per cent, but in April the rate reached as high as 4.49 per cent.

Muir said RBC’s affordability numbers are not as negative as they initially appear, since many buyers are already homeowners who have built up equity that would substantially offset new home purchases. “The reality is that nobody could actually buy a home if they had to pay [more than 70 per cent of income] because they have to pay taxes and eat food, those kinds of things,” Muir said. “When you’re buying a home and you’re getting a mortgage you’ve got about 32, 35 per cent as your gross debt service ratio.

“People who have been in the market for some time have built up a significant amount of equity. So for their home purchase it’s the incremental cost of the next purchase, not the full price, that’s the hit for them.”

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