November 21, 2006


Blurb: The increases in costs associated with home ownership could be coming to an end.


Is housing affordability about to stabilize?


By Peter Diekmeyer •


The real estate sector strength that Canadians have seen in recent years has been good for large swaths of the population. It’s led to boom times for home builders, their employees as well as companies that supply the durable goods that are associated with home ownership such as fridges, televisions and car ports.


The downside is that the rising house prices that we have seen in recent years, coupled with an upwards creep in mortgage rates have been gradually making home ownership more expensive. The cash that new market entrants, many of whom are younger Canadians, need for their initial down payments and related acquisition costs is looking increasingly out of range. Not surprisingly, many are opting to rent rather than buy their first homes.


However according to one expert, those rising homeownership costs appear set to peak. “We have hopes of seeing (housing affordability) stabilize, at least in central Canada,” commented Mathieu D’Anjou, an economist with Desjardins, Canada’s largest banking services cooperative.  “The Bank of Canada appears to be done with monetary tightening. Mortgage rates should therefore fall somewhat in the next few quarters.”


Affordability at a low ebb

As one of Canada’s largest mortgage lending institutions, Desjardins has a strong interest in tracking the costs of home ownership in Canada. To get a better handle on how things are going, its economists recently plowed through both current and historical data, to compile what the company calls the Desjardins Affordability Index. 


The grim news for prospective home buyers is that according to D’Anjou, Canadian housing affordability has been on a long-term decline and is now at its lowest ebb in 15 years. “The message is thus clear: the housing market is no longer as attractive and further home prices increases will be harder to sustain,” wrote D’Anjou in a recent report.


However on a more positive note, Canadians’ disposable income has also been rising in excess of 5.0 percent during the first three quarters of 2006. According to D’Anjou, disposable income remains on average 13.2% higher than what is required to handle the costs of owning a typical home.


Another positive sign is that although the Desjardins Affordability Index is at a long-term low, housing affordability remained relative stable during the third-quarter of this year. Furthermore despite the tough times right now, the index remains well above what it was during the early 1990s.


House prices are the main culprit

The big culprit for the rising home ownerships costs has been rising real estate prices. According to the Canadian Real Estate Association, the average price of a home sold via the organization’s MLS system during October rose by 9.6 percent from a year ago to a record $301,516. House prices are on a particularly strong roll in Western Canada, with records being set in Vancouver, Calgary and Saskatoon.


With all that demand, it’s not surprising that Canadian home builders have been going great guns. According to the Canada Mortgage Housing Corporation, housing starts on a seasonally adjusted basis increased to 223,200 units in October, up from 209,000 in September. For the first ten months of the year housing starts were up 1.6 percent form the corresponding level last year, which in itself was a particularly year strong in historical terms.


Canadian economy could slow slightly in 2007

According to D’Anjou, one of the main factors that boosted housing affordability to the record levels they reached at the beginning of the decade was mortgage interest rates, which reached historically low levels in 2004 and 2005.


In fact rates continue to trend at historically low levels for fixed mortgages of between one and five years in length. That said, the Bank of Canada’s hikes in its key rate, which totaled 1.75%, during the past 15 months, are starting to push mortgage rates up, especially those with shorter maturities.


However despite the rising costs related to home ownership, Canadians remain in surprisingly good shape financially. According to a CIBC report, consumer bankruptcies in Canada are falling at a pace not seen since 1998.


Despite the rough home ownership cost picture, According to D’Anjou, there are signs that things could improve next year. “Everything suggests that residential price increases will continue to (taper off), especially in Quebec and Ontario.” wrote D’Anjou. “And North America’s darkening economic picture could take interest rates down. Growth in ownership costs should slow substantially, nearing the pace of household income growth. This should curb the decline in affordability.”


Experts at the Canadian Real Estate Association tend to agree. “New listings continue to trend higher, which is giving buyers more choice and taking some of the steam out of many local housing markets,” said CREA’s chief economist Gregory Klump. “A more balance market gives buyers more negotiating power and time to make purchase decisions. That trend is forecast to continue and to result in smaller price increases in 2007.”


Peter Diekmeyer ( a freelance business and economics writer.






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