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* Vancouver least affordable, followed by Toronto
* Lower house prices, mortgage rates helping affordability
* Higher rates seen in 2014
By Andrea Hopkins
TORONTO, Feb 25 (Reuters) - Small declines in home prices and mortgage rates made Canadian home ownership slightly more affordable in the fourth quarter of 2012, the second straight improvement, and soft home buyer demand may help continue the trend in 2013, according to a report by RBC Economics released on Monday.
RBC, Canada's largest bank and a huge mortgage lender, measures affordability as the percentage of monthly pre-tax income for a household needed to cover the typical costs of owning a home, including mortgage payments, utilities and property taxes.
By that measure, the cost of owning a home edged down by 0.2 percentage point to 42.1 percent for a detached bungalow, by 0.3 percentage point to 47.8 percent for a two-story home, and by 0.2 percentage point to 28.0 percent for a condominium, the RBC Housing Affordability index showed.
"Exceptionally low interest rates have been the key factor keeping home affordability from reaching dangerous levels in recent years," RBC chief economist Craig Wright said in a statement.
"Residential property values are elevated in Canada and, for many households, ownership remains accessible only because of rock-bottom mortgage rates. It could be a different story if interest rates were to move swiftly and significantly higher."
While a government move to tighten mortgage lending has helped cool Canada's hot housing market, RBC said it expects the restrictive effects of rule changes to dissipate, helping to offset otherwise subdued housing market activity in 2013.
Under changes that took effect in July, the maximum length of an insured mortgage was shortened to 25 years, and the amount homeowners could borrow with a home equity loan was capped. The changes made it more difficult for homeowners to take on too much debt trying to get into Canada's expensive housing market.
Wright said he expects the Bank of Canada to leave its overnight rate unchanged at 1 percent through 2013 and gradually begin to increase it in 2014. By then, the Canadian economy is expected to be on a stronger footing, offsetting some of the potential negative effects of higher borrowing costs, he said.
Home ownership remained least affordable in Vancouver, but improved, with the benchmark for detached bungalows down 2.6 percentage points from the previous quarter to 82.2 percent.
Affordability also improved in Toronto, with the benchmark down 0.4 percentage point to 52.8 percent. Montreal was down 0.9 percentage point to 39.3 percent, Ottawa was down 0.5 percentage point to 38.8 percent and Edmonton was down 0.1 percentage point to 30.7 percent.
Affordability went down in Calgary, where the benchmark rose 0.2 percentage point to 38.1 percent, the report showed.