Housing grows cheaper

There is some good news in the declining housing market: Affordability is improving.

Desjardins Economic Studies says that after eight years of rising prices, housing costs are going down. “For the second quarter in a row we have had an increase in affordability,” said Hélène Bégin, senior economist with Desjardins.

However, she warned that consumers should not get too excited about the market conditions because affordability is still close to the record low reached in 1990.

The Desjardins Affordability Index is calculated by determining the ratio between average household disposable income and the income needed to obtain a mortgage on an average-priced home, known as the qualifying income.

The report from Desjardins said its affordability index climbed to 110.7 last quarter after dropping close to 100 at the end of 2007. In the early 1990s, the affordability index was as low 93.6.

Desjardins says affordability has increased by about 10% in the past two quarters because of falling home prices and lower mortgage rates.

The Canadian Real Estate Association said last week the average price of a home sold in the country’s major markets was $327,020, a 3.6% increase from a year ago.

That was the second consecutive month that prices have dropped on a year-overyear basis.

Statistics Canada also said last month new-home prices grew by only 3.5% in June from a year earlier. It was the slowest rate of growth since March, 2002

Desjardins noted that in the first half of the year, existing home prices rose by 4.4%, compared with 10% a year earlier.

The posted rate on a oneyear mortgage also fell from 7.25% in March to 6.3% by the end of June. The posted rate on a five-year mortgage fell from 7.15% to 7.1% during the same period.

“House prices are just not going up as strongly as before and in some places in Western Canada, like Calgary, we have had some price drops,” Ms. Bégin said. “With the kind of return we have in Calgary, it has a big impact on affordability.”

Prices in Calgary fell 7.8% in July from a year earlier, according to the Canadian Real Estate Association. They were off 5.8% in Edmonton during the same period. Desjardins said affordability in Calgary improved by 7.5% over the past three months.

Even with the improved conditions, affordability is still off almost 30% from the peak reached in late in 2001.

On a long-term basis, Desjardins said it believes affordability will continue to improve. “Prices are going to go up slowly,” Ms. Bégin said. “Out West, we’ve seen a turning point where prices are going down.”

The drop in prices is good news for homebuilders, according to the chief operating officer of the Canadian Home Builders’ Association.

“If you were sitting in my chair, what you would be experiencing is one very busy housing industry from coast to coast,” John Kenward said. “There has been a slowing down in certain markets and builders in those market say it’s a return to a more normal market place.”

(prepared by Garry Marr/Financial Post)