Salmon Arm Shuswap is an alternate....."70% of your income

The affordability of most types of housing deteriorated in the Greater Vancouver area in the first three months this year as prices continued to climb, the Royal Bank said Friday.

Only two-storey houses became slightly more affordable as incomes grew faster than prices for those homes. Affordability of bungalows, condos and townhouses got worse, RBC said.

Greater Vancouver continued to have the least affordable housing in Canada, despite moderating price increases. RBC says it takes 70 per cent of pre-tax income to service basic ownership costs (including mortgage payments, utilities and property taxes) for a two-storey home in the region.

The measure for a detached bungalow in Greater Vancouver was 68 per cent, far above second-place Toronto, where it takes just 43 per cent of pre-tax income to service ownership costs.

According to Derek Holt, RBC assistant chief economist: "The expensive housing market, particularly for stand-alone homes, has already priced many prospective homeowners out of the market."

The bank is forecasting that demand will continue to moderate as high costs force more prospective buyers out of the market. As more listings come on the market, that should help to further restrain price growth.

Condos -- which account for 40 per cent of the Greater Vancouver market, twice the share of 15 years ago -- are likely to become more expensive as mortgage rates continue to rise through the rest of the year and into 2008.

And more people are choosing condos because that is all they can afford in Canada's least affordable real estate market, RBC Financial economist Amy Goldbloom said in interview.

Interest rates are expected to start climbing next month and RBC says long-term mortgages are likely to rise by about three-quarters of a percentage point from today's levels by next year. The bank's posted rate for a five-year closed mortgage is already up almost one percentage point since May, although many lenders will discount posted rates by a full percentage point.

Goldbloom said income gains in Western Canada will be "a powerful offset" to rising rates.

CIBC economist Benjamin Tal also believes the overall impact of rising mortgage rates will be "surprisingly mild" because of the strong labour market in B.C.

"If you have a job and rates are going up, then you simply cut three days from your vacation," Tal said in an interview. "You start to make some tradeoffs."

Rising rates could lead to an increase in home sales over the summer as buyers with pre-approved mortgages jump into the market, said Cameron Muir, chief economist with the B.C. Real Estate Association.

And while more expensive mortgages will erode affordability, he said they also encourage the trend toward a balanced market with more choice for buyers and slower price increases.

After double-digit price increases over the past two years, Canada Mortgage and Housing Corp. expects Greater Vancouver home prices to rise by about nine per cent this year, and another five per cent in 2008.

Across B.C., the RBC affordability index for a detached bungalow stood at 62 per cent in the first quarter and condos at 33 per cent. The index for a standard townhouse was 46.5 per cent and the standard two-storey home at 65 per cent.

(prepared by Michael Kane/Vancouver Sun)

* What RBC Economics says about its methodology: "Our standard housing affordability measure captures the proportion of median pre-tax household income required to service the cost of a mortgage, including principal and interest, property taxes and utilities; the modified measure used here includes the cost of servicing a mortgage, but excludes property taxes and utilities due to data constraints in the smaller CMAs. This measure is based on a 25% down payment and a 25-year mortgage loan at a five-year fixed rate and is estimated on a quarterly basis. The higher the measure, the more difficult it is to afford a house."

Sources: Statistics Canada, Royal LePage, RBC Economics Research, Canadian Real Estate Association