Nationwide housing affordability deteriorated in every consecutive quarter throughout 2007 to end up at its most unaffordable level since the housing bubble peaked in 1990. Back then, soaring interest rates and a recession sparked much of the trouble. Today, however, a long upward trend in house prices driven by sounder macroeconomic fundamentals like job growth is primarily responsible. Adding more fuel to this housing cycle is mortgage product innovation that has expanded the market to more potential buyers since mortgage insurance liberalization began two years ago.

British Columbia - expect more balance in 2008 As forecast, affordability conditions deteriorated across every home segment in the final quarter of 2007 and we still believe the market is poised for some affordability relief. The two-storey segment continues to carry the brunt of the deterioration as the hot Vancouver market remains in deeply stressed territory. The province-wide sales-to-new listings ratio is slowing, indicating a gradual re-balancing of markets. Mortgage rates should be a positive for markets this year as we still expect the five-year fixed rate to drift about 75 basis points lower from current levels. Although house price growth picked up at the end of last year, softening economic fundamentals are expected to temper demand for existing homes and slow price gains in 2008 from the 12% pace in 2007 to the 7% range.

Vancouver - markets still stressed The strong house price gains recorded over the last few years continue to weigh on affordability conditions across the Vancouver market. Two-storey homes are the affordability outliers compared to other major markets with the average selling price now nearing a whopping $650,000 - this sits 35% above the average price for a comparable Toronto home. The sharp erosion in conditions is expected to start filtering through the resale market this year allowing the pace of activity to calm down. The new home market is being driven by the multiples segment that soared in February by 45%. Despite the surge in February starts, some moderation in activity is expected for 2008. This projected slowing is consistent with the sharp deterioration in housing affordability in recent quarters and the fact that most of the strength so far this year has been in the volatile multiples component. As well, a generalized slowing in economic activity, with attendant downward impact on employment and income, will also weigh on housing going forward.

RBC Housing Affordability - March 2008