Canadian Homeowners Feeling Bigger Pinch

Garry Marr, Financial Post Published: Wednesday, November 25, 2009

Bidding wars and higher interest costs have lead to the inevitable - a drop in housing affordability for the first time in five quarters, according to a new index produced by the Royal Bank of Canada.

The bank says home ownership costs are up, something that has not happened since the spring of 2008. Despite the increase, costs are still off the peak reached for this housing cycle.

Royal Bank says 45.8% of pre-tax household income was needed to service the cost of owning a standard detached home in the third quarter of this year. That was up 1.2 percentage points from a quarter ago but well off the high of 52.3% hit in the 2008. The all-time high was 57.1%, reached in the second quarter of 1990.

"Home affordability has deteriorated in all provinces and major markets in Canada due to a slight rise in key mortgage rates and appreciation in property values," said Robert Hogue, senior economist with Royal Bank.

Further proof that house prices are on the rise came Wednesday from the Teranet-National Bank National Composite House Price Index which showed September house prices were up 1.3% from the month before, the fifth straight month that prices have risen.

"The vigor is consistent with an improvement in market conditions over 2009 to date - more homes have been selling and fewer have been coming on the market," said Marc Pinsonneault, senior economist with National Bank Financial Group.

Data released this month from the Canadian Real Estate Association, which represents 100 boards across the country, shows the trend of escalating prices is not slowing down. The Ottawa-based group said existing home prices were up 20.7% last month from October, 2008, the largest year over year increase in 20 years.

Those price increases have come as interest rates have also started to rise. Mr. Hogue said the 5.4% posted rate for a five-year closed mortgage, reached in the second quarter, is the lowest since Royal Bank started doing the study in 1985. Rates climbed to 5.73% in the third quarter for a five-year closed mortgage. The posted rate is generally at least one percentage point higher than what consumers can get on a discounted basis.

Prices have also been impacted by a supply shortages across the country. New listings last month in the country's 25 largest markets were off 16% from a year ago. New home construction is on the rise but has not been able to respond fast enough to meet the rising demand.

Phil Soper, chief executive of Royal LePage Real Estate Services, expects the supply side problem to improve in the spring, a traditional time when families consider selling to coincide with the end of the school year.

"It's a much more common time for people to list their homes than this time of year," said Mr. Soper. "I suspect the supply side of this problem will ease considerably."

He's also not that concerned with rising mortgage rates. "That's what I hoped would happen," said the chief executive. "I know policy makers are hoping they can ease their stimulative approach to monetary policy at the same time as consumer confidence and the economy overall start to improve and not cause a sharp negative downturn in housing activity. So far, this is unfolding in not a bad fashion."

gmarr@nationalpost.com