Canada no longer appears to be immune to a generalized housing downturn though housing affordability conditions across all segments have started to improve, according to a report released Monday by RBC Economics.

“While the Canadian housing sector is entering a cyclical downturn, the risk of experiencing a U.S.-style meltdown is remote,” said Robert Hogue, senior economist, RBC. “Many of the factors that triggered the collapse in the United States are either absent or of much lower significance on this side of the border.”

The report notes that as a sluggish Canadian economy threatens income growth and erodes consumer confidence, the following factors will mitigate some of the downside risks to the housing sector:

> the sub-prime business remains marginal; banks are stable and lending;

> households are generally not overstretched financially; and

> speculation in the housing market is more subdued.

“These factors should provide enough of a foundation to prevent housing markets from spiraling down even as the Canadian economy slips into recession,” said Hogue.

The RBC Affordability measure is the proportion of pre-tax household income needed to service the costs of owning a home. Across the country, the standard condo remained the most affordable housing type requiring 31.4% of pre-tax household income in the third quarter of 2008. A standard townhouse was next at 36.9%, followed by a detached bungalow at 45.7%, while a standard two-storey home remained the least affordable housing type at 52%.

According to the report, housing affordability deteriorated significantly during the boom of the past several years, mainly as price increases outpaced family income growth. At the national level, affordability reached its worst levels in late 2007 since early 1990s. At the end of 2007 the red-hot Alberta housing market began to slide, followed by British Columbia in early 2008, and now Saskatchewan and Ontario have joined the weakening trend.

According to RBC Economics, issues of affordability are coming to the forefront in this weakening economic climate. In fact, most of the market corrections taking place in British Columbia, Alberta and Saskatchewan can be traced to very poor affordability conditions.

While there has been some improvement since the beginning of the year, RBC’s Affordability measures generally remain above their long-run averages across Canada. Relative to historical norms, markets in British Columbia, Saskatchewan and Alberta are the least affordable in the country.

Among Canada’s largest cities, RBC’s Affordability measure for a detached bungalow is as follows: Vancouver 74.8%, Toronto 53.3%, Calgary 47.3%, Ottawa 43.3% and Montreal 40.4%.

IE