While mortgage rates have softened slightly, rising home prices have eroded improvements in housing affordability, a new analysis has found.
According to an analysis conducted by Ratehub.ca, the minimum income required to purchase an average-priced home increased in 11 of the 13 markets examined between January and February. Between December and January, affordability had improved amid softening mortgage rates.
The average mortgage stress test, which requires prospective buyers to prove they can afford payments at a higher rate, dipped to 7.63 per cent in February, based on an average five-year fixed mortgage rate of 5.63 per cent. But an increase in home prices has offset the gains in affordability.
“The two key variables, which are home values and interest rates, have moved in opposite directions since January; interest rates are down and home values are up in 12 out of 13 cities,” James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender, said in a statement.
“The increase in home values was enough such that affordability decreased in 11 of 13 cities despite the drop in rates.” Ratehub.ca calculated the income required to purchase an average-priced home based on a mortgage with a 20-year downpayment, 25-year amortization, $4,000 in annual property taxes and $150 for monthly heating. The mortgage rates used – 5.71 per cent in January and 5.63 per cent in February – were the average of the Big Five banks' five-year fixed rates at the time. Average home price data were from the Canadian Real Estate Association's average home price index.
The analysis showed that the largest increase in minimum income required to buy an average-priced home was in Toronto, rising $3,800 to $214,100, as average home prices jumped by $28,100 to $1.09 million. Hamilton saw minimum income requirements increase by $3,770 to $167,100, as average home prices rose $26,300 to $835,900. In Vancouver, the minimum income required to buy a home increased by $2,570 to $230,350, as home prices hit $1.18 million.
Victoria and St. John’s were the two cities where income requirements declined. Victoria saw minimum income requirements fall by $1,060, as average home prices increased by just $100 to $848,000. The minimum income required to purchase a home in St. John’s fell by $1,000, as average home prices slipped by $3,200 to $328,800.
Laird notes that the fluctuations in income requirements are less than the swings seen in previous months, due to interest rates and house prices moving in opposite directions. Ratehub.ca expects that affordability will continue to decline, as the market is showing signs that the spring season will bring about strong demand.
Economists widely expect that the central bank will begin cutting interest rates soon, with a surprise slowdown in Canada's annual inflation rate bolstering expectations of a June cut. A Desjardins report from earlier this year said that lower interest rates are expected to bring prospective homebuyers off the sidelines, resulting in a broad-based rebound in home prices in the second half of 2024 that will spill over into 2025.
Over the long term, the spread of reported coronavirus cases beyond China to South Korea, Iran, and, most recently, Italy and California, highlight the challenges associated with containment and further delay projections of when the outbreak might peak. The continued spread of the virus at this stage seems inevitable, which will severely draw down oil consumption in the near term, and increasingly effect expectations for economic growth—and the oil market—recovery over the long term.
eah Zlatkin, a licensed mortgage broker and expert with LowestRates.ca, said in a statement on Thursday that she believes that first-time buyers elected to wait for the COVID-19 pandemic to “normalize” before buying a home. “First-time buyers are usually more nervous to purchase their first home so they waited. This is when we saw the buyer frenzy happen,” she said. Other findings included that 37 per cent of respondents purchased a larger home between 2022 and 2024, marking a 14 per cent increase when compared to the period between 2021 and 2023.
The Canadian Real Estate Association says February home sales jumped 19.7 per cent compared with a year ago in what could mark the "last relatively uneventful month of the year." The association said Monday the increase in part reflected weakness last year, as the result for February 2023 was one of the lowest for the month in the past two decades. It said current activity has also climbed back to only around five per cent below the 10-year average.
On a month-over-month basis, seasonally adjusted home sales in February dipped 3.1 per cent compared with January. CREA said it is seeing a general trend of "somewhat higher levels of activity over the last three months compared to a quiet fall market in 2023."
The number of newly listed properties was up 1.6 per cent month-over-month. Meanwhile, there were 3.8 months of inventory on a national basis at the end of February 2024, up from 3.7 months at the end of January, but short of the long-term average of about five months of inventory. The actual national average home price was $685,809 last month, up 3.5 per cent from February 2023. Vy Ngo, a sales representative with Big City Realty Inc. Brokerage, said buyers are showing a lot more optimism than they were at the end of last year. "Personally, my clients are getting pre-approval.
"Once the Bank of Canada lowers their rates, I think the market is going to be back on fire again," she said. Ngo said she sold a house last month in the Toronto area that spent just three days on the market. "My client originally wanted to sell end of last year and I told them to just hold on to the new year. That was a pleasant sell."
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj..
