Rising home prices eroded affordability in February

Mortgage rates have ticked down slightly in recent weeks, with optimism of more cuts around the corner – but heating spring home prices have effectively wiped out any savings for would-be borrowers.

The latest home affordability data compiled by Ratehub.ca found that during the month of February, property prices rose in 12 of 13 major markets, enough so that it offset easing mortgage rates and the benchmark for the stress test. 

The study calculates the minimum annual income required to buy an average home in some of Canada’s major cities based on February 2024 and January 2024 real estate data. The report illustrates how changing mortgage rates, stress test rates and real estate prices are impacting the income needed to buy a home.

Prices and mortgage rates moving in “opposite directions”

“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. The increase in home values was enough such that affordability decreased in 11 of 13 cities despite the drop in rates,” says James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender.

“Because the two key variables moved in opposite directions, the fluctuation in income required is lower than the swings we’ve seen in past months.”

According to the February numbers, the average mortgage stress test in Canada has decreased to 7.71%, based on an average five-year fixed mortgage rate of 5.71%. That’s down from 8.16% as of January. Several lenders discounted their fixed mortgage rate options during February, due to dropping bond yields, which contributed to the overall lower stress test criteria. 

Also read: How to stress test your mortgage

However, those looking to take out a mortgage last month would need to earn a higher income than they would have needed to in September, as average home prices surged in many markets.

February 2024 home affordability report

Data in the chart is based on a mortgage with 20% down payment, 25-year amortization, $4,000 annual property taxes and $150 monthly heating. Mortgage rates are the average of the Big Five Banks’ 5-year fixed rates in February 2024 and January 2024. Average home prices are from the CREA MLS® Home Price Index (HPI).

Ontario markets most affected

This was especially evident within Ontario’s Golden Horseshoe markets; Toronto experienced the most significant increase, with buyers requiring an additional $3,800 in income to purchase the average-priced home of $1,093,900. Hamilton was a close second; home buyers there required $3,770 more in income in February than they had in January, to buy a home at an average of $835,900.

In Vancouver, the required income rose by $2,570, in order to purchase a home at the average price of $1,183,300.

Affordability to decrease further as rate hold remains

The national housing market is already showing hints that the spring season will be a robust one. The latest data from the Canadian Real Estate Association reports home sales rose nearly 20% year over year in February, as previously stagnant buyers – who chose to wait out the Bank of Canada’s rate hiking cycle – are ready to jump back in due to the prospect of lower rates later in 2024.

That’s pushed up the national average home price by 3.5% to $685,809. CREA also notes that the MLS Home Price Index – a measure of the most typical home price in Canada, with the highs and lows stripped out – was flat on a monthly basis, ending five consecutive months of declines. Such a rapid shift is “exceedingly rare” says CREA, and reflects quickly rebounding housing activity.

“After two years of mostly quiet resale housing activity there’s a feeling that things are about to pick up,” said Larry Cerqua, Chair of CREA. “At this point, it’s hard to know whether buyers are going to wait for a signal from the Bank of Canada or whether they're just waiting for the spring listings to hit the market." 

Economists largely anticipate the Bank of Canada will be in the position to cut interest rates in the latter half of 2024, assuming inflation continues to trend downward in line with the central bank’s forecast. The next BOC rate announcement is scheduled for April 10, 2024.

Also read:

• February Canadian home sales surge on rate cut optimism
• Home affordability improved across Canada as the stress test eased in January
• Mortgage payment defaults are on the rise
• Bank of Canada holds target interest rate at 5% in March 2024 announcement
• Toronto home sales surge in February as buyers expect rate cuts
• 67% of mortgage borrowers are worried about making their renewal payments