The RBC reports 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," Craig Wright, RBC's chief economist, said in a statement.
"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."
RBC's affordability index for a detached bungalow stood at 43.1 per cent of income nationally in the first quarter, up 0.8 percentage points from the fourth quarter of 2011 and up 1.5 percentage points from the first quarter of 2011.
That figure assumes an average home price of $360,500 for a 1,200 square foot, one-storey house and $77,900 in annual qualifying income. Based on those figures, an owner would need to spend 43.1 per cent of annual income to pay for mortgage payments, utilities and property taxes.
The deterioration of affordability — the proportion of pre-tax income required to service the costs of owning a home — was most acute in Vancouver, where the costs associated with owning a detached bungalow at market prices rose 3.1 points to 88.9 per cent of annual income.
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, which is Canada's most expensive real-estate market, RBC assumes an owner would need $155,900 of 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 ten dollars earned each year towards mortgage payments, utility costs and property taxes.
Wright makes clear the affordability index does not mean homeowners in Vancouver are spending most of their income on costs associated with owning a house. He says the high reading is an indicator of the "stresses and strains" of home ownership and a predictor of future direction in the market.
"The index shows that relative to history affordability is quite strained now," he explains.
For instance, since 1985 when RBC first began the measure affordability, the index has averaged 39.4 per cent nationally, so the 43.1 level shows modest stress. In British Columbia, however, the current measure of 68.6 is well above the 49.8 average, which suggests home prices are likely to decline.
In Toronto, the index deteriorated by 1.2 percentage points to 53.4 per cent based on $110,000 in annual income; in Montreal, the cost of ownership increased 1.2 percentage points to 41.4 per cent of income at $64,100, and in Ottawa it was up 0.9 per cent to 41.8 per cent of income at $88,800.
In Calgary, by contrast, only about 36.7 per cent of pre-tax income would be required to pay for a standard bungalow — unchanged from the previous study — and in Edmonton the index improved by 0.4 of a percentage point to 32.4 per cent.
Qualifying income was also lower in the two Alberta cities than in Vancouver, Toronto or Ottawa, at $87,000 in Calgary and $73,000 in Edmonton.
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 towards 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 persistent 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.
RBC's localized affordability measures are adjusted to reflect the different market costs of real-estate and the amount of income that a buyer would need to qualify for a typical mortgage that would fix interest rates for five years.
In Toronto, the country's second-most expensive real-estate market, a buyer would require $110,000 of annual income to afford a bungalow, $129,800 a year to afford a two-storey house and $71,200 to afford a condo.