November 28, 2009

RBC Economics Research – November, 2009.

Affordability improvements halt in third quarter

“The string of significant improvements in housing affordability in Canada finally came to an end in the third quarter. RBC’s affordability measures rose at the national level for the first time in six quarters for all housing types: by 0.5 percentage points to 27.6% for a standard condominium; by 0.7 percentage points to 32.3% for a standard townhouse; by 1.0 percentage point to 40.2% for a typical detached bungalow; and, by 1.2 percentage points to 45.8% for a standard two-storey home. (A rise in the measure represents a deterioration in affordability.)”

“All provinces and major metro markets shared in the deterioration in affordability in the third quarter. British Columbia, especially Vancouver, posted the biggest increases by far in the RBC measures. Toronto and Calgary also recorded notable increases for some housing types, while the rise in the cost of homeownership in the rest of the country has generally been modest”.

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In another news article published by Globe And Mail, “Canada’s housing rebound sparks fear of bubble“,  low rates, mortgage innovation and a relative shortage of new supply were cited to be the reasons for the quick rebounce in Canadian’s housing market.

“A Canadian can get a variable-rate mortgage as low as 2.5 per cent right now, as the Bank of Canada has locked its lending rate near zero to spur economic activity. Mr. Holt expects the average mortgage to creep toward 5 per cent within three years, which could mean hundreds of dollars more a month for the average mortgage holder.

For example, a five-year variable rate mortgage at 2.25 per cent on $300,000 would carry a monthly payment of about $1,300, assuming a 25-year amortization period. A move to 5 per cent would boost the payment to $1,750″.

Eventually higher interest rates will slow the demand for housing.

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