Housing Affordability, RBC April 2009

RBC Housing Affordability Index is a measure of a household’s median pre-tax income that goes towards housing costs (mortgage payments, taxes, utilities).

These measures are based upon a conventional 25% down payment and 25 year amortization period so it is likely that inclusion of 35 year amortizations would further decrease typical mortgage costs and increase affordability.

Overall, Canadian affordability has shown improvements over the 4th quarter of 2008 with lower mortgage rates having the largest impact in the recent reversal of RBC measures in addition to rising family incomes. Only in Edmonton, Calgary and Vancouver were lower home prices a major factor in the year over year changes to affordability.

In Alberta, home resales dropped to a 12-year low at the end of 2008 while an abundant supply of available properties has further accelerated price drops. While poor affordability was largely behind the initial downturn in housing, current poor economic conditions have proven to be the key market driver.

Housing market activity in Edmonton and Calgary contracted sharply during the second half of 2008 with the cancellation of major capital projects and rising unemployment dampening overall demand for housing.

By the end of 2008, Calgary houses prices had dropped 12-14% from their mid 2007 peak while Edmonton house prices showed a decrease of 8-20% from its peak.

It is important to keep perspective as overall, average price changes for a detached bungalow in Calgary were only 4.5% lower in Q4 2008 vs. Q4 2007. In Edmonton, average price changes for a detached bungalow were only 8.0% lower in Q4 2008 vs. Q4 2007.

This market correction is helping to restore some degree of affordability in both Calgary and Edmonton.