The pace of home price growth may be slowing in much of Canada, but steep mortgage costs continue to erode affordability for many would-be borrowers.
According to the new data from Ratehub.ca, home affordability – based on the minimum income required to purchase the average priced home – declined in eight of 10 major city markets between July and August. The study, which is based on real estate data from those respective months, illustrates how changing mortgage rates, stress test rates and real estate prices are impacting the income needed to buy a home.
Mortgage rates have risen slightly on a monthly basis, as bond yields remain above the 3.9% range – which has pushed fixed mortgage rates higher – and the Bank of Canada’s Overnight Lending Rate sits at 5%, resulting in a prime rate of 7.2% and elevated variable mortgage rates.
Due to this, the mortgage stress test has increased to 8.22% from 8.12% last month, based on a fixed mortgage rate of 6.22% (the average of the Big Five Banks’ five-year fixed rates in July and August 2023). Borrowers taking out new mortgages, or renewing or refinancing their existing ones with new lenders, must prove they can financially carry their mortgage at this higher threshold, which tacks 2% onto their contract rate.
Vancouver sees largest drop in affordability
As in previous months, housing affordability deteriorated by the largest extent in Vancouver, despite home prices softening to $1,208,400; the elevated stress test has been enough to increase the income requirements to purchase a home in the city.
“In the 10 cities we looked at, average home prices were up in four cities and down in six cities. In Vancouver, despite the average home price decreasing by $2,300, affordability worsened due to the rise in mortgage rates, with $1,480 in additional income required to purchase a home,” says James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender.
In Toronto, however, where home prices dropped by nearly $20,000, it was enough to offset the impact of rising borrowing costs.
“Toronto saw the biggest home price decrease month over month at $19,800,” Laird adds. “This price decline was significant enough to make an impact on home affordability, with $1,950 less income needed to purchase an average home in the city.”
The City of Hamilton was the only other market included in the study that saw an improvement in affordability, with the required income to purchase a home falling by $490, reflecting a $9,900 drop in the average home price.
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