TORONTO - Canadians will find it more expensive to own a home this year and in 2011, as higher interest rates are expected to chip away at affordability even as the rise in home prices begins to subside, two of Canada's major banks predicted Tuesday.
A report by RBC Economics Research released Tuesday said affordability would deteriorate throughout 2010 and 2011 as rising interest rates increase mortgage and other loan payments.
"Some erosion in affordability is going to come from higher interest rates... (meanwhile) prices continue to rise. Combine the two and I think the second quarter you should expect some further deterioration in affordability," said RBC senior economist Robert Hogue.
Canada's hot housing market is coming back into balance between supply and demand following a seller-friendly period in which buyers competed for -- and drove up the prices of -- the few houses for sale during the first stages of economic recovery.
As demand cools and supplies increase, the pace of price increases will slow, but won't fall fast enough to offset rising interest and mortgage rates, Hogue said.
"I'd be hard-pressed to see any kind of the recent pace in price increases being maintained but it might not be an outright decline any time very soon," he added.
The RBC report found home ownership costs in Canada rose across all housing segments in the first three months of 2010 -- the third quarter of increases in a row.
With the exception of Alberta, home affordability measures deteriorated across all provinces with significant declines in affordability in British Columbia, Saskatchewan and Manitoba. Housing affordability declined more moderately in Quebec, Ontario and Atlantic Canada.
A second report on housing affordability released Tuesday by CIBC World Markets found home ownership remains within reach for most Canadians.
"Affordability is not at a crazy level -- yes, it has been deteriorating over the past few months, but it's not at a crazy level, it's actually at a very sustainable level," said CIBC senior economist Benjamin Tal.
Tal's report found the average price of a house has risen by nearly 23 per cent since reaching recent cyclical lows in January 2009. And the erosion of affordability -- as interest rates rise faster than prices drop -- could cause problems for the most vulnerable segment of the population, he said.
CIBC's new home ownership affordability index found that home ownership is increasingly difficult for families with household incomes less than $50,000, who on average spend close to 60 per cent of their gross income on mortgage payments, property taxes and electricity costs.
The report found that Canadians today spend 15.6 per cent of their average gross personal income on mortgage payments, which is about the same as 10 years ago. When adding in electricity bills and property taxes, it rises to about 22 per cent of gross income.
Both reports concluded that although home ownership will be pricier, it will remain far from the peak levels seen in early 2008, just before the recession hit.
The Bank of Canada is widely expected to raise its key lending rate for banks this summer from the record lows to more normal levels through the second half of this year and in 2011. But Tal predicted that rates will only climb very slowly over the next two years.
"I see the housing market of tomorrow being much less exciting than the housing market of yesterday," he said.
Tal predicted that in the second quarter of the year, affordability will continue to deteriorate, even as prices level off. He added that home prices will fall in the second half of the year and in to 2011, which will improve affordability.
"I don't think affordability will be a major issue over the next two years. I think it will be relatively stable with interest rates rising, but prices actually going down a little bit," he said.
He added that higher interest rates will lead to modest declines in prices in the coming year or two. And, he said, the adjustments will eventually to a healthier housing market by mid-decade.
