Home ownership costs will continue to rise as higher mortgage rates set in

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The costs associated with home ownership in Canada will continue to rise this year and in 2011 as higher mortgage rates set in before there is any substantial drop in prices, two of Canada's major banks predicted today.
A report by RBC Economics Research released Tuesday found homeownership costs in Canada rose across all housing segments in the first three months of 2010 - the third quarter of increases in a row.
"We expect affordability to deteriorate throughout 2010 and 2011, but this should be limited as more balanced supply and demand conditions will take much of the steam out of the housing market," RBC economist Robert Hogue said.
The main contributing factor is an expected rise in interest rates as the Bank of Canada raises its key lending rate for banks from the record lows to more normal levels through the second half of this year and in 2011.
The timing of the central bank's move has been hotly debated. The Bank of Canada's next rate announcement is scheduled for June 1 and the following announcement will be in July.
According to the RBC report, the cost of home ownership in Canada is still moderately above the long-term average but unlikely to exceed the peak levels reached in early 2008.
A strong real-estate market and jacked-up housing prices in some markets are getting the blame for putting a strain on Canadians' bank accounts.
With the exception of Alberta, home affordability measures deteriorated across all provinces with a significant decline in affordability in British Columbia, Saskatchewan and Manitoba. Housing affordability declined more moderately in Quebec, Ontario and Atlantic Canada.
However, a second report on housing affordability released Tuesday by CIBC World Markets said home ownership remains within reach for most Canadians, despite skyrocketing prices.
"The vast majority of home owners in Canada regardless of their age have not experienced any worsening in affordability despite the rapid increase in prices," says CIBC economist Benjamin Tal in his latest Consumer Watch report.
But the report found home ownership is increasingly difficult for families with household incomes less than $50,000, who on average spend close to 60 per cent of their gross income on mortgage payments, property taxes and electricity costs.
CIBC's home ownership affordability index found that Canadians today spend 15.6 per cent of their average gross personal income on mortgage payments, which is about the same as 10 years ago. When adding in electricoty bills and property taxes, it rises to about 22 per cent of gross income.
Meanwhile, the average price of a house has risen by nearly 23 per cent since reaching recent cyclical lows in January 2009.
"This pace of appreciation has been quicker than justified by housing market fundamentals such as income, rent or demographic changes," Tal said.
The Canadian housing market has started to stabilize in recent months as supply rises steadily and home prices are starting to respond. But Tal said it is unlikely that prices will crash any time soon or that interest rates will become abnormally high.
"While the Bank of Canada is very clear about its intention to raise rates soon, an array of limiting factors including a strong dollar, the end of fiscal stimulus, a slower pace of economic activity in the U.S., and a more rate-sensitive household sector suggest that rates will only climb very slowly over the next two years.
He added that the extended period of low interest rates in Canada did not lead to a surge in the number of mortgage borrowers. But the average mortgage size in Canada is close to $170,000, up from $120,000 in 2004.
Tal found that the increase in the average size of mortgage has not significantly eroded affordability.
"While higher interest rates will clearly erode affordability, our detailed look at the distribution of mortgage payments as a share of income does not reveal major pockets of vulnerability. Accordingly, the most likely scenario is that higher interest rates will lead to a modest decline in prices (probably in the magnitude of five to ten per cent) in the coming year or two."
But Tal said the effects of modest mortgage rates hikes and the market's return to balance will result in a more long term adjustment and pave the way for a healthier housing market by mid-decade.

Organizations: RBC, Bank of Canada, CIBC World Markets

Geographic location: Atlantic Canada, Alberta, British Columbia Saskatchewan Manitoba Quebec Ontario U.S.

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Recent comments

  • b
    July 02, 2010 - 13:21

    And in other news, the sun will rise tomorrow morning, details at six.

  • b
    July 01, 2010 - 20:05

    And in other news, the sun will rise tomorrow morning, details at six.