Price levels alone don’t tell us if valuation in a particular area is high, or at risk of a substantial correction. Other factors such as average incomes in the area need to be considered. Let’s look, then, at the most recent RBC Housing Affordability Measures report.
For a standard two-storey house in Canada, home ownership costs (including mortgage payments, utilities and property taxes) take 46.2% of a household’s pre-tax income. The average since 1985 is 43.7%. Bankers historically have preferred homeownership costs to be lower than 40% of gross monthly income.
In Vancouver, the RBC affordability index stands at 77.8% (compared to the historical average of 62.9%). Next come Toronto (56.6%), Montreal (51.6%), Ottawa (40.5%) and Calgary (37.0%).
Toronto is only 3 percentage points above its historical average while Montreal is 10 points above. Ottawa is fractionally higher, while Calgary is actually 4 percentage points lower. The Maritimes, Manitoba and Saskatchewan have affordability readings from 37% to 40%, not far from their long-term averages.
Vancouver clearly raises some concerns. Indeed, the Demographia International Household Affordability Survey ranks the city the third least affordable in the world. To a lesser extent, Montreal poses a few worries. Toronto may have some of the highest houses prices in Canada but they aren’t too far out of line in relation to income levels. Ottawa looks even less risky, and Calgary -- although its average price level is relatively high -- is not only one of the most affordable the RBC survey but also showing the most improvement.
Risk can also be assessed by the ratio of house prices to household incomes, which removes the impact of mortgage rates. As mortgage rates are currently quite low and likely to revert to higher levels, price-to-income ratios provide another perspective on risk levels.
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