The 2023 housing market commenced on a chilly note as steep borrowing costs kept buyers on the sidelines, leading to a 14-year low for January sales.
A total of 20,931 homes traded hands last month, according to the latest stats from the Canadian Real Estate Association (CREA). That marks a -3% dip from December – effectively wiping out any small short-term gains – and a whopping -37.1% difference from last year, which went on record as the second-best January ever for sales. In contrast, today's sales figure is the lowest for the month since 2009, following the slowing trend that started last summer.
Housing prices continued to fall, with homes selling for an average of $612,204 across the nation, down -18.3% annually, and -1.8% from December.
The MLS Home Price Index – the measure CREA uses to define a typical home transaction with the extreme highs and lows stripped out – fell another -1.9% on a month-over-month basis, marking a -12.6% decline from last year. CREA notes the index now sits -15% below last February’s market peak.
Today’s buyer needs more income to buy a home
The January numbers starkly highlight how the Bank of Canada’s rate hiking cycle – which began last March – has squeezed buyers. Many would-be purchasers are struggling to qualify for a mortgage given today’s elevated rates and steep stress test. Meanwhile, existing homeowners are grappling with increased debt servicing costs, as variable-rate mortgage payments have soared.
According to data compiled by Ratehub.ca, the required income needed to purchase a property has increased in nine out of 10 major markets, compared to January 2022. This is despite the reported deep year-over-year declines in home prices; the large increases to both fixed and variable mortgage rates outweigh any price relief buyers may otherwise enjoy.
“Home prices are down, but affordability is worse than 12 months ago,” says James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender.
“With current fixed rates, the stress test is currently around 7.37%, which is over 2% higher than a year ago. The increase in rates is more material than the decrease in home values so far, which means homes are less affordable in nine out of 10 of the cities we looked at compared to a year ago.”
How much income do you need to afford a home in Canada?
Using January 2023 real estate data as reported by CREA, Ratehub.ca has calculated the minimum annual income required to buy a home in Canada’s major cities, including changes to mortgage rates, stress test rates and real estate prices, as illustrated in the chart below.
- The city that has seen affordability erode the most is Victoria, where homebuyers’ required income has increased by $25,500. This corresponds with its year-over-year average price decline of -$11,800, the smallest of all the included cities.
- The only city to see affordability improve was the City of Hamilton, where buyers need an average of $4,350 less income to afford a home. This is due to a drop in average price of $202,900, the largest annual decline of all cities, by a considerable margin.
- The City of Toronto came in eighth in terms of worsening affordability, reflecting an increase of $7,620 in required income and a $178,600-decline in the average home price.
From a shorter-term perspective, however, there is some cause for optimism. Compared to Ratehub’s October affordability analysis, recent stabilization among both fixed and variable mortgage rates has been enough to turn the dial slightly for buyers’ affordability, with the required income declining in every market except Halifax.
Home supply showing signs of improvement
In the meantime, those who are on the hunt for a home will enjoy slightly more supply to choose from. Sellers – likely encouraged by those early signals of rate stabilization – added 47,025 new listings to the market in January, a 3% gain from December.
However, from a historical perspective, supply still remains extremely tight, down to a low not seen since 2000. Overall, there are 4.3 months of inventory (the amount of time it would take to fully sell off all available homes for sale) nation-wide, similar to where to where it sat prior to the COVID-19 lockdowns, and well below its long-term five-month average.
That small infusion of supply was enough to take further pressure out of the market, though, lowering the sales-to-new-listings ratio (SNLR) to 50.7% from 54% last month. That indicates balanced market conditions, and nearly to its long-term average of 55.1%.
The bottom line:
Early-year signals from the Bank of Canada have raised cautious expectations that rates will soon stabilize, as inflation has been trending in the right direction. However, the economic data continues to be volatile: a recent crop of numbers, such as Canadian and US labour reports, as well as a higher-than-expected US CPI – have caused doubt in the markets that central banks will truly have the flexibility to end their rate hiking cycles in the short term.
Until more data comes out – namely, the BoC’s next rate announcement on March 8 – analysts aren’t sure how the market will play out in the coming months, given how tough affordability conditions remain.
“Early 2023 feels a lot like 2019, where after a year in which it became much harder to qualify for a mortgage, everyone was wondering if the market would pick up in the spring,” wrote Shaun Cathcart, CREA’s Senior Economist. “In 2019 the market started off slow, as there wasn’t much to buy. It took off once spring listings started to come out. With the Bank of Canada increasingly signaling that rates are now at the top, it’s possible the spring market this year could also surprise, particularly in areas where prices have been stable or are now stabilizing.”