Housing affordability improves in Canada in fourth quarter

Small declines in home prices and mortgage rates made Canadian home ownership slightly more affordable in the fourth quarter of 2012, the second straight improvement, and soft home buyer demand may help continue the trend in 2013, a report by RBC Economics said.

RBC, Canada's largest bank and a huge mortgage lender, measures affordability as the percentage of monthly pre-tax income for a household needed to cover the typical costs of owning a home, including mortgage payments, utilities and property taxes.

By that measure, the cost of owning a home edged down by 0.2 percentage points to 42.1 per cent for a detached bungalow, by 0.3 percentage points to 47.8 per cent for a two-storey home, and by 0.2 percentage points to 28.0 per cent for a condominium, the RBC Housing Affordability index showed.

"Exceptionally low interest rates have been the key factor keeping home affordability from reaching dangerous levels in recent years," RBC chief economist Craig Wright said.

"Residential property values are elevated in Canada and, for many households, ownership remains accessible only because of rock-bottom mortgage rates."

While a government move to tighten mortgage lending has helped cool Canada's hot housing market, RBC said it expected the restrictive effects of rule changes to dissipate, helping to offset otherwise subdued housing market activity in 2013.

Under changes that took effect last July, the maximum length of an insured mortgage was shortened to 25 years, and the amount homeowners could borrow with a home equity loan was capped.

The changes made it more difficult for homeowners to take on too much debt trying to get into Canada's expensive housing market.

Wright said he expected the Bank of Canada to leave its overnight rate unchanged at 1 per cent through this year and gradually begin to increase it next year. By then, the Canadian economy was expected to be on a stronger footing, offsetting some of the potential negative effects of higher borrowing costs, he said.

Meanwhile, home ownership remained least affordable in Vancouver, but improved, with the benchmark for detached bungalows down 2.6 percentage points from the previous quarter to 82.2 per cent.