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Canada's housing affordability worsens as home prices continue to rise: RBC Economics

TORONTO, Ontario, May 25, 2010 — Homeownership costs in Canada rose for the third straight quarter across all housing segments, as a strong real estate market and increased prices made it more expensive to own a home, according to the latest housing report released today by RBC Economics Research.

"Although home ownership became more costly in the first quarter of 2010, affordability measures are still moderately above the long-term average and below peak levels," said Robert Hogue, senior economist, RBC. "We expect affordability to deteriorate throughout 2010 and 2011, but this should be limited as more balanced supply and demand conditions will take much of the steam out of the housing market."

The RBC Housing Affordability measure captures the proportion of pre-tax household income needed to service the costs of owning a home. During the first quarter of 2010, measures at the national level rose across all housing types (the higher the measure, the more difficult it is to afford a home).

The detached bungalow benchmark measure rose by 0.9 of a percentage point to 41.1 per cent, the standard townhouse inched up by 0.4 of a percentage point to 33 per cent, the standard condominium climbed by 0.5 of a percentage point up to 28.2 per cent and the standard two-storey home increased by 0.6 percentage points to 46.8 per cent.

The report projects that the cost of owning a home will continue to rise. The main contributing factor will be the expected rise in interest rates, as the Bank of Canada moves towards raising the current exceptionally low rates to more normal levels through the second half of this year and in 2011. According to the report, housing affordability measures in Canada are unlikely to exceed the peak levels reached in early 2008.

"We believe that the spectacular rally in housing prices over the past year will soon end, as rock-bottom mortgage rates increase," noted Hogue. "Sustained economic growth over the next year and the ensuing rise in job creation and household income should keep home affordability from spiraling out of control."

With the exception of Alberta, home affordability measures deteriorated across all provinces with a significant decline in affordability in B.C., Saskatchewan and Manitoba. Housing affordability declined more moderately in Quebec, Ontario and Atlantic Canada.

RBC's Housing Affordability measure for a detached bungalow in Canada's largest cities is as follows: Vancouver 73.4 per cent (up 4.8 percentage points over the last quarter), Toronto 49.1 per cent (up 0.4 of a percentage point), Ottawa 40.3 per cent (up 0.3 of a percentage point), Montreal 39.7 per cent (up 0.9 of a percentage point), Calgary 36.5 per cent (down 0.3 of a percentage point) and Edmonton 32.0 (down 0.5 of a percentage point).

The RBC Housing Affordability measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market. Alternative housing types are also presented including a standard two-storey home, a standard townhouse and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household's monthly pre-tax income.

Highlights from across Canada:

The full RBC Housing Affordability report is available online, as of 8 a.m. E.D.T. today at