House prices keep going up but they are more affordable thanks to cheap debt

House prices keep going up in most parts of the country but affordability improved last quarter, according to one of the country’s major banks.

Royal Bank of Canada chalked up the apparent discrepancy to mortgage rates, which continue to hover near all-time lows and have reduced interest costs.

“It was more affordable to own a home in virtually all provincial and major local markets across Canada in Q2, and in the face of solid price gains no less,” said Craig Wright, chief economist with RBC, in a release.

The site RateSpy.com says variable mortgages with a five-year term come with a rate as low as 2.25% today while fixed rate mortgage for five years are now as low as 2.67%.

“We had anticipated a rebound in activity from earlier this year when the harsher than normal winter weather took hold, but the biggest drop in fixed mortgage rates in almost four years and resulting improvement in affordability also gave the Canadian housing market a boost of extra energy,” said Mr. Wright.

The Canadian Real Estate Association reported this month July sales rose 7.2% from a year ago. Prices across the country jumped 5% during the same period with the average sale price $401,585.

RBC said resales picked up in May and June and contributed to a 9.4% seasonally-adjusted gain in the second quarter, the strongest quarterly gain in almost four years. Not accounting for seasonal factors, it was second-best period for the quarter ever on record.

The jump in activity was attributed to sellers with new listings up 8% from a quarter earlier after three consecutive quarterly declines.

“Stats rolling in suggest that the upward momentum in Canada’s housing market is being sustained and further, that a sharp slowdown is not imminent,” said Mr. Wright, adding the rate of price increases will not be sustained.

And while affordability may be improving now, RBC says the historically low interest rates cannot be maintained and long-term rates will rise later in the year in anticipation of a rate move by the Bank of Canada in 2015.

“Rates would erode housing affordability across Canada and weigh on homebuyer demand,” warns RBC.

The bank’s affordability index nationally fell by 0.9 percentage points in the second quarter to 48% for what it calls a two-storey home.

RBC measures affordability as the proportion of pre-tax household income needed to service the costs of owning a home. Those costs include mortgage payments, utilities and property taxes.

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