TORONTO -- Royal Bank's latest housing affordability report says home ownership became more affordable in the most recent quarter due to a modest decline in home prices and gains in household incomes.
RBC's affordability index for a detached bungalow stood at 42 per cent of income nationally in the second quarter, one percentage point lower than the third quarter of 2011.
That means an owner would need to spend 42 per cent of pre-tax annual income to pay for mortgage payments, utilities and property taxes.
The index fell even more for two-storey homes, by 1.2 percentage points to 47.8 per cent and eased 0.6 percentage points to 28 per cent for condos.
The bank says ultra low interest rates have been the key factor in keeping affordability levels from reaching dangerous levels in recent years.
RBC notes that Canada's housing market cooled further in the third quarter, partially because of the effects of a fourth round of rule changes to government-backed mortgage insurance.
It expects the negative effect on home sales will ease by the end of the year and that resale activity will stabilize next year.
During the quarter, housing affordability fully reversed the mild erosion in affordability during the first half of the year, said RBC chief economist Craig Wright.
"The broad affordability picture has been somewhat stationary over the last two years, alternating between periods of improvement and deterioration, resulting in an affordability trend that is, on net, essentially flat," he said.
Wright expects the Bank of Canada to begin raising its overnight lending rate for banks --which affects bank's prime lending rates -- from the current one per cent in the second half of next year, assuming the euro crisis remains in check and U.S fiscal issues are addressed.
"This, along with the expected continued growth in household income, will lessen the risk of marked erosion in affordability," he said.
Despite the recent improvement in affordability, RBC said the amount of income to service home ownership costs continues to be higher than long-term averages, though national figures are skewed by "extremely poor affordability" in the Vancouver area.
"The cost of owning a home took a smaller bite out of household pocketbooks in the third quarter as home prices fell -- most notably in the Vancouver area, though it remains the least affordable market in Canada by a wide margin," explained Wright.
Affordability in Vancouver stood at 83.2 per cent of income, followed by Toronto at 52.4 per cent, Montreal 40.2 per cent, Ottawa at 38.7 per cent, Calgary at 38.3 per cent and Edmonton at 31.1 per cent.
