RBC study: homes will be more affordable in 2008

If the Royal Bank. is correct, this could be great news for anyone entering the housing market

Buying a house will become easier and more affordable in 2008, according to a Royal Bank of Canada report released Thursday.

Canadians in the market for a new home will likely be helped by dropping interest rates, say RBC economists. Just this week, the Bank of Canada cut its key rate by one-quarter of a percentage point Tuesday.

Derek Holt, assistant chief economist at RBC, says he expects consumers will benefit as longer-term mortgage rates come down. He added that central banks will probably lower interest rates further -- perhaps by a full percentage point -- and that should make short-term mortgages more affordable.

Potential homebuyers will also be helped by a slowing in the appreciation rate of the resale value of homes. The RBC report notes that home ownership costs -- which last year climbed steadily -- will probably be one of the biggest factors making homes easier to buy in 2008.

"Almost every house class in every province and major city saw affordability deteriorate last year," said Holt.

"Unlike the late 1980s and early 1990s when both unemployment rates and interest rates pushed into double digits and led to declining affordability, the prime culprit this time around has been a long string of house price gains that have outstripped income gains."

In late 2007, B.C. homebuyers were hardest hit as housing affordability "deteriorated to its worst level since 1985." The report states that the province should see "modest improvements in 2008."

The study notes that Alberta's red-hot housing market will also likely cool due to "a softer influx of migrants," making homes easier to buy for homebuyers who were priced out of the market last year. In Ontario, toughening economic conditions are expected to slow income growth and so will moderate housing price gains.

The RBC report predicts that Canada's overall resale house price appreciation is likely to slow to between five and seven per cent this year.