TOPIC THIS WEEK: The Decline of Housing Affordability

By Paul Li

Owning a home in Canada is getting harder, according to a RBC Economics Research report. The quarterly report shows that their key RBC Housing Affordability Measures for Canada, which measures the percentage of household income taken up by ownership costs, moved up between 1.1 and 2.1percent in the second quarter of 2010- the fourth straight increase.

The report also found that British Columbia is close to the all-time highs that were felt in 2008. Household incomes taken by ownership costs ranged from over 70% for two-storey homes to 65% for bungalows and almost 35% for Condo units. The changes are mostly due from the effects of increases in the interest rates which compound with higher home prices relative to income levels.

“Home prices in B.C. have come under downward pressure recently,” said Robert Hogue, senior economist at RBC in a press release. However, “since the start of the year, higher mortgage rates in the second quarter boosted monthly mortgage servicing charges.”

The increased interest rates are the result of several consecutive increases in the key overnight interest rate by the Bank of Canada. The rate is one of policymakers’ key tools to manage the economy, with lower rates used to stimulate the economy and higher rates used to slow it down to prevent overheating. Since January 2010, the overnight rate has increased by 0.75%.

The increased overnight rates directly increase the mortgage rates offered by the banks to consumers, which has led to increased borrowing costs for new and existing mortgages.

The RBC Housing Affordability Measures compares the costs of a “standard” home, as opposed to luxury units, in terms of mortgage payments, utilities, taxes. These are compared against the median, pre-tax income of the population.

Weighing In: So what does this mean for you.

Since the Great Depression, society as a whole has realized that sometimes it is necessary to have the Government involved in the economy. In particular, we have come to see the Government as guarantor that certain prices move in desired directions. Thus, we expect wages to always go up, and we hope that the price of basic goods such as food and transportation go down. If the price of labour is too low, we demand minimum wages. If the price for food, or energy, or transportation goes up we ask for subsidies.

Housing, however, breaks this convention. Along with food, it is the one everyone needs- there are no substitutes for having a roof over you. And yet, perhaps it is testament to the times we live in that we tend to cheer when housing prices are going up, but cry, shout and protest when housing prices go down.