Home prices expected to drop, costs to rise

Tue May 25, 2010 2:35pm EDT
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TORONTO (Reuters) - Canadian home ownership costs are rising and affordability is eroding, while overvalued house prices are due for a correction in the coming year or two, a pair of reports by banks said on Tuesday.

CIBC World Markets' new Home Ownership Affordability Index found home ownership was within reach for most Canadians but increasingly difficult for some. It also said about 17 percent of all dwellings in the country were above fair value.

"While the booming housing market is starting to come back to earth, the fact that prices are overvalued today does not necessarily mean that they will crash tomorrow," said Benjamin Tal, senior economist at Canadian Imperial Bank of Commerce.

He predicted that higher interest rates will lead to a modest decline in prices, probably between 5 and 10 percent, in the coming year or two.

The CIBC index considers demographics and mortgage type, in additional to the price of homes, interest rates and income.

"The vast majority of home owners in Canada, regardless of their age have not experienced any worsening in affordability despite the rapid increase in prices," said Tal, noting that the average size of a mortgage, which has risen 42 percent in six years to C$170,000, has not coincided with a significant worsening in affordability.

But CIBC found that families with household incomes of less than C$50,000 were spending close to 60 percent of gross income on mortgage payments, property taxes and electricity costs.

"This is three times the average ratio seen among households at the same age groups but with income of over C$50,000," said Tal.

Separately, the RBC Housing Affordability measure for the first quarter of 2010 showed that home ownership costs had risen across all housing segments, according to a report by Royal Bank of Canada.   Continued...