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Higher prices, mortgage costs have little effect:
Oct 03, 2008

A new report by RBC Economics says housing affordability in Manitoba has not been significantly eroded by higher home prices and mortgage rates.

The bank’s Housing Affordability Index released this week reported that higher borrowing costs and higher average selling prices have been offset by growth in household incomes.

“Manitoba’s average weekly earnings growth is currently one of the strongest in the country, so housing demand remains generally well supported — good news in the face of rising borrowing costs in the months ahead,” according to the report.

“Housing demand is also getting a demographic boost as total net migration flows into the province have moved into a sustained positive position for the first time in almost two decades.

According to the index, affordability  in the province dropped slightly to 29.4 per cent, and is now back to levels seen at the end of last year. “This translates into an average monthly payment of $1,141, which is 4.4 per cent higher than the first quarter.”

The report indicated that house prices began to reaccelerate in some Canadian markets. At $198,637, Canada’s benchmark price of a detached bungalow was up 6.9 per cent from the previous quarter, marking the strongest pace of acceleration since the first quarter of 2003. 

Posted five-year mortgage rates rose by 60 basis points from the first quarter, averaging 6.45 per cent — a level not seen since the end of last year. 

Given the double-whammy of higher home prices and higher mortgage rates, RBC’s housing affordability indicator — which measures the proportion of pre-tax household income taken up by ownership costs — eroded to 31.7 per cent from 30.1 per cent in the previous quarter. This marks the least affordable level since the final quarter of 2000. In the second quarter, monthly ownership costs averaged $1,332, 6.2 per cent higher than in the previous quarter. 

The biggest deterioration occurred in the least affordable province — British Columbia. Its index rose from 40.1 per cent to 43.1 per cent, the worst level experienced there in four years. Alberta and Atlantic Canada were tied as the most affordable with an index reading of 26.7 per cent. 

The strong pace of housing activity in the second quarter was largely driven by the previous period’s decline in mortgage rates and corresponding improvement of affordability. This is because potential buyers have the ability to “lock-in” their approved rates for between 30 and 90 days. Consequently, housing sales in the third quarter could fall by as much as 10 per cent, reflecting the second-quarter erosion of affordability. 

The report said the expected pace of eroding affordability in the balance of this year and next will be mitigated to some extent by three factors. “First, the increase in mortgage rates is likely to be measured and mild. Second, an improving supply of housing, both in the resale and new home market, will begin to stem the reacceleration of rising house prices in most markets. Third, as the economy continues to improve so, too, will income growth. 

“These factors will help to keep the housing market on a solid foundation as it comes off its highs.”