It’s getting more difficult to pay the costs associated with home ownership in the Vancouver area and the tab is likely to rise more as interest rates rise, the Royal Bank said Tuesday.
In Vancouver, which is Canada’s most expensive real-estate market, RBC found that the cost of owning a detached bungalow including mortgage payments, utilities and property taxes is now 88.9 per cent of median annual household income, the Royal Bank said Tuesday. For Vancouver, the figures use a median household income of $56,000. Qualifying income is what is needed to meet banking requirements to borrow a mortgage to finance the home.
The RBC figures assume an owner would need $155,900 of qualifying annual income to make mortgage payments on a bungalow priced at $832,600. Based on those figures, the owners would have to direct $8.89 of every $10 of median income earned each year toward mortgage payments, utility costs and property taxes, the RBC Housing Trends and Affordability report found.
For a two-storey home, the figures are even more dramatic: an owner would need to spend $9.30 of every $10 of median income earned toward their home and would require a qualifying annual income of $163,100 to borrow to buy a home valued at $865,500.
For a condominium in Vancouver, the RBC report shows an owner would need to spend $4.49 of every $10 of median income earned toward owning a home, and the qualifying income would be $78,700 to buy a $410,800 condo.
Across the country, the RBC found that rising house prices were responsible for a modest deterioration in home affordability in the first few months of 2012 after two quarterly improvements, but warns that rising interest rates are the more pressing concern long-term.
“It became a little tougher on household budgets to carry the costs of owning a home at market prices at the start of this year,” said Craig Wright, RBC’s chief economist said in a statement Tuesday.
“Strong buyer demand was a principal driver of the modest rise in home ownership costs. While the deterioration in affordability was felt to varying degrees across the country, it was mild in most cases.”
The national affordability index stood at 43.1 per cent of median income, up 0.8 percentage points for the fourth quarter of 2011 and up 1.5 percentage points from the first quarter of 2011.
There was a similar trend in Toronto, Montreal and Ottawa but the bank’s affordability index was unchanged in Calgary and improved in Edmonton compared with the fourth quarter of 2011.
In Vancouver, the 88.9 per cent of income affordability index was up 3.1 points in the same time period. The average affordability index for Vancouver since 1985 is 59.2.
Tsur Somerville, director at the University of B.C. Centre for Urban Economics and Real Estate at the Sauder School of Business, said he doesn’t think the drop in affordability is to blame for the slowdown in Vancouver’s real estate market in the last few months.
“Of course, affordability is biting, and what I mean by that is that it is creating challenges for people who can’t afford the housing that they wanted to have,” Somerville said. “But for the most part the way the way people have reacted here is to go small or move further out rather than not buy.
“Given our affordability issues, you’d think that our home ownership rate would be low, but it’s not.”
Somerville said the new mortgage rules don’t affect first time home buyers that much, and that affordability doesn’t affect buyers using foreign money.
Wright said the affordability challenge will likely increase once the Bank of Canada begins raising interest rates.
“Exceptionally low interest rates have been the key force in keeping affordability from hitting dangerous levels in Canada in recent years,” Wright said.
“Affordability headwinds are likely to increase next year, as interest rates make their way toward more normal levels.”
He said RBC expects Canada’s central bank will hike rates gradually, starting in the fourth quarter.
“A gradual pace of increases will allow income growth to provide some offset,” he said.
However, there have been persist ant warnings from the Bank of Canada, federal government and many economists that Canadian household debt levels are precariously high.
There have also been concerns that prices for certain types of homes and certain local markets — condominium apartments in Vancouver and Toronto, in particular — have risen too quickly to be sustainable.
Source: The Vancouver Sun