Houses became more affordable for 1st time in over 2 years, says RBC, but there's a catch

Buying a house became more affordable in Canada for the first time in more thantwo years in the last quarter of 2017, according to a new report from the Royal Bank of Canada, but the relief for buyerswilllikely not last.

RBC'soverall housing affordability measure fell by 0.2 percentage points to 48.3 per cent in the last three months of last year. A decrease in the measure represents an improvement in affordability.

"The steady and rapid deterioration in home ownership affordability over the past two years in Canada finally came to a stop in the fourth quarter," saidRobert Hogue,senior economist atRBC Economic Research, in a report on Thursday.

The decline was mainly driven by falling house prices in the Toronto area since the introduction of the Ontario Fair Housing Plan in April last year to cool the once red-hot market, among other measures.

Greater Toronto Area sales data released on Wednesday also showed that home sales fell nearly 40 per cent in March from a year ago, as the average price of a home declined to$784,558 down from an average of $915,126 in March2017.

'No turning point'

But the "welcome relief in affordability" for homebuyers in Canada, particularly in Toronto, is "no turning point" for the property market,said Hogue.

"It would be tempting to view the fourth quarter's affordability improvement in Canada as the start of a new, friendlier trend for homebuyers. But this is unlikely to be the case for a few key reasons," he said.

First, he expects house prices in Toronto to "bottom out sometime this spring;" second, rising interest rates will put pressure on home ownership costs and third, recent policy measures are more likely to reduce household and market risks instead of providing "material affordability relief."

"Our view is that the Bank of Canada will hike its overnight rate to 2.25 per centby the first half of 2019 and we expect longer-term rates to rise in tandem," Hoguesaid. "Higher interest rates have the potential to stress housing affordability markedly in Canada.

"We estimate that, everything else remaining constant, a 100 basis point increase in mortgage rates would lift RBC's aggregate affordability measure for Canada by about fourpercentage points," he said.

The Bank of Canada has already hiked interest rates three times since the middle of last year, raising the key lending rateby a total of 75 basis pointsto 1.25 per cent.

Markets are predicting a70 per cent chance that the central bank will raise interest rates again byJuly.

Hoguepointed out that some of the adverse impact on affordability could be offset by rising household incomes, but it was unlikely that incomes would rise fast enough to fully counteract rising house prices.

He also added that the new more stringent mortgage qualifying rules will be anotherhurdle facingnewhomebuyers.

"The new rules that came into effect in January, as well as earlier rule changes, have raised the ownership bar for buyers who need a new mortgage like the vast majority of first-time homebuyers," he said.