Canada’s overall housing affordability improved in the fourth quarter of 2006, according to the latest Housing Affordability report released today by RBC Economics.

“The improvement was driven by faster income growth, slowing house price increases, a small decline in mortgage rates and lower utility bills,” said Derek Holt, assistant chief economist, RBC. “Overall, there is the potential for better housing affordability conditions in 2007, especially in Western Canada, as the market moves into more balanced territory.”

RBC notes that while there were significant variations in the pace of the current housing market slowdown across the country, the common trends in the fourth quarter were a weaker pace in resale activity, an increase of homes on the market, and more moderate price growth.

The RBC Affordability report captures the proportion of pre-tax household income needed to service the costs of owning a home. The most affordable housing class remains the standard condo, requiring 27.5% of income. A standard townhouse is next at 31.7%, followed by a detached bungalow at 39.4%. A standard two-storey home, while improving, remains the least affordable housing type at 44.9%.

According to the RBC report, the western provinces continue to show signs of price growth topping out, with British Columbia, Alberta and Saskatchewan having likely reached the peak of price appreciation. These provinces, along with Manitoba, reported some affordability improvements. In fact, Alberta’s housing affordability deteriorated for the fifth consecutive quarter, but appears to have slowed significantly. In Central and Eastern Canada, housing affordability improved across-the-board as housing markets continued to soften alongside weaker economic growth.

RBC’s Affordability measure for detached bungalows in Canada’s largest cities is as follows: Vancouver 68.5%, Toronto 42.6%, Calgary 40.9%, Montreal 35.3% and Ottawa 30%.

Also included in the report are housing affordability conditions for a broader sampling of smaller cities across the country. For these smaller cities, RBC has used a narrower measure of housing affordability that only takes mortgage payments relative to incomes into account.

The Housing Affordability measure, which RBC has compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market. Alternative housing types are also presented including a standard two-storey home, a standard townhouse and a standard condo. The higher the reading, the more costly it is to afford a home. For example, an Affordability reading of 50% means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50% of a typical household’s monthly pre-tax income.