Housing affordability eroded in 2002 as lower mortgage rates and higher household income failed to offset increased housing prices, according to the new Housing Affordability Index released today by RBC Economics.

RBC’s 17-year old Housing Affordability Index – which measures the proportion of pre-tax household income needed to service the costs of owning a home – climbed to 31.8% from a three-year low of 30.6% a year earlier. The index is expected to drift higher, to 32.7%, in the first quarter of 2003, with mild deterioration throughout 2003 to an average reading of 33.4%.

“The Canadian housing market is a pillar of strength, but rising prices are beginning to bite into housing affordability,” said Carl Gomez, RBC economist. “A drop in mortgage rates lowered borrowing costs during the fourth quarter of 2002, but a rapid surge in house prices offset these benefits.”

“We expect housing affordability will continue to deteriorate over 2003, as rising home prices are joined by higher borrowing costs. Still, affordability for Canadians will remain at reasonable levels by historical standards,” said Gomez.

The Housing Affordability Index, which RBC has compiled since 1985, is based on the costs of owning a detached bungalow, a typical target home for first-time buyers. The higher the index, the more difficult it is to afford a house.

In the last quarter of 2002, the average cost of owning an average detached bungalow in Canada was $1,248 (principal, interest, property taxes and utilities), up from $1,178 a year earlier. Regionally the costs ranged from a low of $914 a month in Atlantic Canada (or 26.8% of household income) to a high of $1,564 a month in British Columbia (or 39.7% of household income).

For the first quarter of 2003, RBC forecasts that the drift up in the affordability index to 32.7% will translate into $1,288 in average Canadian ownership costs, ranging from a low of $935 in the Atlantic region to $1,597 in British Columbia.

Affordability in Canada’s three largest cities breaks down as follows for the last quarter of 2002: Vancouver (47.7%), Toronto (39.1%) and Montreal (30.7%).

The full RBC Housing Affordability Index report is available online at www.rbc.com/economics/market/pdf/house.pdf.