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In low interest rate environment, home affordability remains stable: RBC

05/23/2013 12:00 EDT | Updated 07/22/2013 05:12 EDT
OTTAWA - A new analysis from the Royal Bank (TX:RY) finds home ownership in Canada remains largely affordable, even if there are signs of mild financial stress among indebted families.

The RBC says its latest affordability report shows household financial conditions relative to home ownership were relatively unchanged in the first quarter of 2013 compared with the fourth quarter of 2012.

The RBC affordability measure represents the pre-tax household income required to service the costs — mortgage, utilities and property taxes — of owning a home.

The higher the measure, the less affordable that home is to a particular household.

In the case of standard two-storey homes and condos, the overall index readings were largely unchanged at 48 and 28.1 per cent respectively.

For owners of detached bungalows, the index deteriorated only slightly, by 0.3 points, to 42.5 per cent.

The bank says exceptionally low mortgage interest rates are the main reason affordability remains stable

However, RBC chief economist Craig Wright cautions he would be singing a different tune if interest rates were to suddenly rise.

With home prices still near or at record levels and household debt per annual income also at an all-time high, the Bank of Canada has been warning for years that Canadians need to prepare their finances for when mortgage costs begin to rise.

In one sense, they have. Bank governor Mark Carney has recently noted that more and more Canadians are choosing to lock in their mortgages for five years and moving away from more volatile variable vehicles.

As well, says Wright, the day of reckoning is still some ways in the future. He predicts the central bank likely won't start hiking rates until mid-2014, and even then only moderately.

When that day does happen, Wright added, it will be because the Canadian economy has strengthened and households likely will start enjoying stronger income growth, meaning they may be able to absorb higher mortgage costs.

Given the variation in home prices and incomes, there is wide disparity in RBC's affordability measure depending on location.

For instance, the affordability reading on a bungalow in Vancouver, where home prices top the nation, deteriorated slightly to 82.3 per cent in the first quarter.

The measure was also slightly higher, or worse, in Toronto at 53.8 per cent, in Montreal at 40.1, in Ottawa at 39.1 and in Calgary at 38.7.

The affordability measure dropped, or improved, by 0.2 points in Edmonton to 30.4, and was down one point to 38.1 in Saskatchewan, where no city was listed.