* Affordability rises as home prices fall, incomes gain
* Rise in affordability reverses previous drop; trend is flat
* Vancouver still least affordable city though prices lower
TORONTO, Nov 22 (Reuters) - Falling home prices and an uptick in household income made Canadian home ownership slightly more affordable in the third quarter, but the longer-term trend is largely unchanged, according to a report by RBC Economics released on Thursday.
RBC, Canada's largest bank and a huge mortgage lender, measured 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 1.0 percentage point to 42.0 percent for a detached bungalow, by 1.2 percentage points to 47.8 percent for a two-story home, and by 0.6 percentage point to 28.0 percent for a condominium, the RBC Housing Affordability index showed.
"The broad affordability picture has been somewhat stationary over the last two years, alternating between periods of improvement and deterioration, resulting in an affordability trend that is, on net, essentially flat," RBC chief economist Craig Wright said in a statement.
"We saw this directionless trend in the third quarter as housing affordability fully reversed the mild erosion witnessed in the first half of the year."
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 ease by the end of the year, with resale activity stabilizing 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 make it more difficult for homeowners to take on too much debt in Canada's red-hot housing market.
Wright said he expects the Bank of Canada to begin raising interest rates gradually in the second half of 2013, assuming problems in Europe and the United States are addressed.
"This, along with the expected continued growth in household income, will lessen the risk of marked erosion in affordability," Wright said.
Home ownership remained least affordable in Vancouver, where the benchmark for detached bungalows fell 5.8 percentage points from the previous quarter to 83.2 percent.
Affordability also improved in Toronto, with the benchmark down 0.7 percentage point to 52.4 percent. Ottawa was down 0.4 percentage point to 38.7 percent, Calgary was down 0.7 percentage point to 38.3 percent, and Edmonton was down 0.6 percentage point to 31.1 percent.
Affordability rose in Montreal for a detached bungalow by 0.1 percentage point to 40.2 percent, the report showed.