While speculation regarding the cooldown in Canada’s housing market usually takes a negative spin, a report from the Royal Bank of Canada shows that falling home prices are opening the door to affordable housing for many prospective buyers.
Stricter regulations affect home prices
A report from the Teranet-National Bank shows that Canadian housing prices declined from September to October, marking the third time in 13 years of data that prices declined during this time of year.
Despite data from the bank’s national composite house price index showing that October house prices were up an average of 3.4 percent across the country compared to the same time last year, October also marked the 11th consecutive month of deceleration for year-over-year price increases. October experienced a 0.2 percent drop in average house prices from the previous month.
Lower home prices benefit buyers
The RBC’s affordability index showed that reduced home prices and gains in household income have resulted in more affordable housing options for Canadians.
The index showed that during the third quarter, a detached bungalow would require 42 percent of income to afford mortgage payments, utility bills and property taxes. This marks a drop of one percentage point from the second quarter of 2012. Meanwhile, two-storey homes fell 1.2 percentage points in the third quarter, reaching 47.8 percent on the affordability index. Condominiums decreased by 0.6 percentage points, reaching 28 percent.
"The costs of owning a home at current market prices took a smaller bite of household budget in all major markets in Canada in the third quarter of 2012," the report said.
Edmonton and Calgary led the nation in housing affordability, reaching 31.1 percent and 38.3 percent on the index, respectively. Ottawa came next at 38.7 percent, followed by Montreal at 40.2 percent and Toronto at 52.4 percent. Vancouver was the most expensive market for housing, reaching 83.2 percent on the index.
The RBC’s report credits continued low interest rates with keeping housing affordable.
Interest rates to remain low
Interest rates fluctuate depending on inflation, and with Canada’s annual inflation rate remaining at 1.2 percent, analysts see no reason for interest rates to rise from their historic lows.
"Inflation remains a dead issue in Canada," said Derek Holt, vice president of economics at Scotia Capital. "It's very early in the quarter with only October nailed down, but [fourth quarter] inflation is thus far undershooting Bank of Canada expectations."
In fact, mortgage interest costs decreased by 2.6 percent during October.
Report forecasts temporary cool-down
In addition to favorable news for home buyers, the RBC report also provides an optimistic outlook for Canada’s housing market as a whole. Despite drops in home sales and resale activity, the RBC predicts that the market will stabilize in the coming year.
Meanwhile, the RBC also forecasts that homes will remain affordable.
"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," said Craig Wright, chief economist at the RBC. “This, along with the expected continued growth in household income, will lessen the risk of marked erosion in affordability.”
This is all positive news for consumers looking to invest in a home. The improved affordability in the market, in addition to ultra-low mortgage rates, will most likely spur on Canadian home buyers, despite what the RBC says is a temporary slowdown in the home sales market.