Market enters ‘uncharted waters’ as affordability plummets, RBC says
Derrick Penner
Sun
The cost of owning an average bungalow in Vancouver would eat up 62 per cent of the median income, a figure that exists in “uncharted waters” in terms of real estate unaffordability.
The finding is in RBC Economics’ latest Housing Affordability Index report, which found that B.C. and Alberta posted the sharpest declines in the affordability of housing.
“B.C.’s housing affordability continued to erode in every housing segment,” Derek Holt, RBC’s assistant chief economist said in a statement on Tuesday.
RBC said surging prices, which have far outpaced a healthy 4.6-per-cent growth in B.C. incomes over the past year, are to blame.
“Bungalow and townhome markets are setting new records while condos and standard two-storey homes lie close to 1990 records as the province’s housing market enters uncharted waters,” Holt added.
The RBC affordability index measures costs of owning condominiums, townhouses, bungalows and two-storey detached houses as a proportion of the pre-tax, median income. It assumes buyers make a 25-per-cent down payment with 25-year amortization.
On that measure, condominiums are the most affordable, consuming almost one-third of the median Vancouver income, townhouses would take up 46 per cent, and a two-storey detached home would require 67 per cent of that pre-tax pay.
The measure essentially means that median-income earners have been priced out of the single-family-home market in Vancouver.
Kevin Lutz, RBC’s B.C. mortgage manager, noted that banks would only approve mortgages to borrowers at a maximum of 32 per cent of their income as long as their total debt did not exceed 40 per cent.
Lutz added that if prices keep going up at current rates, or interest rates rise, the continual erosion of the affordability measure will knock more buyers out of the market.
“You always have a certain amount of people shopping for homes at the limit of their financing,” Lutz said.
If prices keep going up, he added, the laws of supply and demand will take hold and “more and more people will be forced to sit on the sidelines.”
“Then naturally, you’re going to have price adjustments, because less and less people will be able to afford [homes] and prices will go down.”
RBC’s findings echo the observations Canada Mortgage and Housing Corp. has made over recent months, said CMHC market analyst Cameron Muir.
Earlier this month, Muir reported that the average mortgage payment in Vancouver hit $2,322, its highest level in 12 years and heights not seen since the last two housing-market peaks in 1994 and 1989.
Lutz said there is some measure of relief for buyers in sight in a levelling out of prices.
Muir said sales in recent months have fallen and inventories have risen, though those factors are “not enough evidence to identify a trend.”
“There will be a point at which homebuyers will be unwilling to continue buying homes immediately at the asking price,” Muir added, “and that will have a moderating impact on pricing.”
He expects that to be sometime in 2007, at which point price increases will be more in line with the rate of inflation.
Lutz said for now, the market still shows signs of strength. RBC’s mortgage approvals are exceeding rates that the bank saw last year.
He added that recently approved 30 and 35-year mortgage amortizations are helping to keep buyers within the affordable range as well. Lutz noted that the current posted rate of 6.75 per cent for a five-year mortgage is still less than one percentage point off the 40-year low recorded three years ago.
© The Vancouver Sun 2006