Title: Housing affordability continues to improve

Sub-title: Falling prices and slumping mortgage rates are turning many Canadian regions into buyers’ markets.


The severity of the current recession has made it hard to find any positive signs. But in recent weeks, a new trend has emerged: politicians, economists and other commentators have taken pleasure in the fact that although a lot for the recent data is bad….it is not as bad as it was during previous months. This, they regard as a signal that the recession is bottoming out.


Yet while it is almost certainly too soon to say whether the economy has indeed hit bottom, a key signal that we are getting there, will be when more people start to think about getting into the housing market. There are signs that this is already happening.


For example the national average price of homes sold via the Canadian Real Estate Association’s Multiple Listing Service fell during March 2009 to $288,641, down by 7.7 percent compared to one year earlier. Yet despite the bad news, the drop represents the smallest year-over-year decline registered over the past six months. Further adding grist to the mill, existing home sales increased by 7.0 percent in March to 31,135 units, following February’s 10.3 percent jump.


“A number of major housing markets are stabilizing, as buyers respond to improving affordability,” said Gregory Klump, CREA’s chief economist. “Looking back to economic recessions in the early 1980s and 1990s, national resale housing activity bottomed out before the job market or the economy did.”


Affordability is increasing

Robert Hogue, a senior economist at RBC Economics Research agrees. “There are some enlightening developments on the affordability front through the first quarter of 2008,” said Hogue.

Hogue’s department tracks the percentage of median household pre-tax income in various markets that is required to service the mortgage costs on an existing housing unit. “The sharp deteriorating trend in RBC’s affordability measures from about 2004 to late 2007-early 2008, has reversed in the past year,” comments Hogue.


Existing home prices aren’t the only ones that are coming down. The cost of buying a new home is falling too. According to Statistics Canada, contractors’ selling prices of new homes fell by 0.7 percent between January and February. The biggest decreases were in western markets. Prices fell by 3.0 percent in Edmonton and by 2.9 percent in Vancouver. Quebec City bucked the trend, with prices there actually increasing as builders took advantage of rising land prices in the city.


That said, according to Hogue, although falling house prices are one reason for rising housing affordability, they are far from the only one. “Only in Calgary, Edmonton and Vancouver was price a constructive factor in the year-over year change, although price has played a wider beneficial role in more recent quarters,” says Hogue. “Higher utilities and property taxes have remained a modest undermining factor.”


Borrowing costs in particular have fallen drastically. One broker, Invis, charges annual interest of just 3.95 percent for fixed five-year mortgages, compared to 5.59 percent on April 1rst of last year. “The improvement can be primarily credited to monetary policy. Lower mortgage rates account for the largest potion of the reversal in RBC’s measures in almost all major urban areas across Canada,” comments Hogue. “Rising family income also contributed positively across the country.”


Some positives in an uncertain future

So is the increased affordability of Canadian homes a harbinger of a major turnaround? RBC’s Hogue for one isn’t sure. “Going forward, low mortgage rates and persisting downward pressure on housing prices will continue to help affordability,” wrote Hogue in a recent note to clients. “But slowing income growth will act as a restraint.”


Data regarding housing sector construction are not too promising either. Housing starts were running at a seasonally adjusted annual rate of just 154,700 units in March, with much of the strength in that number coming from apartment and condo construction, which is considered less beneficial to the economy than building new detached homes. The March pace was far below recent levels, which topped 200,000 units during each of the past seven years.


That said, March’s pace, which Canada Mortgage and Housing Corporation experts say is far more sustainable than the frenzied activity of recent years, was significantly faster than the 136,100 units that were started in February.


In short, although housing starts were weak last month, they were less weak than they were the month before. And in today’s economy, that’s probably as positive a sign as you are going to get.


Peter Diekmeyer (peter@peterdiekmeyer.com) is a Montreal-based business and economics writer.





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