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Home affordability eroded in July as mortgage stress test pushes 8%

July Affordability Study

Penelope Graham

The summer housing market continued to show signs of stabilization in July as more supply came online among fewer buyers, many of whom stepped back following a mid-month rate hike from the Bank of Canada.

The latest numbers from the Canadian Real Estate Association show a total of 41,186 properties sold over the course of the month, marking an 8.7% increase from last year, but roughly flat from June (-0.7%). Meanwhile, the number of newly-listed homes rose by 5.6% annually – not enough to offset year-over-year sales activity, but effectively easing conditions somewhat for buyers.

The average Canadian home price came in at $668,754, up 6.3% from the same time period last year. The MLS Home Price Index – which reflects the most typical type of home sold with the high and low extremes stripped out – dipped -1.5% from last year, but rose 1.1% from June.

According to CREA, just over half of all local markets saw an increase in buyer appetite. That doesn’t include the Greater Toronto Area, however, where a monthly decline of -8.7% was enough to chill the national picture to “slightly negative.” Sales also dipped in the Fraser Valley by -11.1%, but rose in Montreal, Edmonton, and Calgary.

"Following a brief surge of activity in April, housing markets have settled down in recent months, with price growth now also moderating with its usual slight lag,” said Shaun Cathcart, CREA’s Senior Economist.

“Sales and price growth are already showing signs of tapering off further in August in response to the Bank of Canada's mid-July rate hike and messaging regarding above-target inflation for longer than previously expected. We’re probably looking at another round of ʻback to the sidelines’ for some buyers until there’s a higher level of certainty around interest rates going forward.” 

The Bank of Canada most recently implemented a 0.25% increase on July 12, bringing its benchmark Overnight Lending Rate – which consumer lenders use to set their variable mortgage rate pricing – to 5%. Overall, the rate has increased by 4.75% since March 2022, following a series of 10 increases – the steepest Canadian central bank hiking cycle in history.

As a result, variable mortgage rates have surged from their pandemic-era lows of 0.85% to the 5.95% - 6.10% range today. Fixed mortgage rates have also increased materially over that time period due to rising bond yields; the lowest five-year fixed-rate option today is currently 5.24%, compared to 2.59% back in March 2022.

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Rising home prices and mortgage rates further squeezed buyers

In fact, soaring mortgage rates continue to erode homebuyer affordability across Canada, even in markets where the average home price has dropped.

Recent data from Ratehub.ca shows that the income required to purchase the average-priced home increased in all 10 major cities studied, due to higher mortgage rates putting upward pressure on the mortgage stress test threshold. Based on July 2023 and June 2023 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. 

“Most Canadians can now expect an average stress test of 8% or higher, which is the highest stress test home buyers have ever seen,” says James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender.

“Mortgage rates increased significantly from June to July, which has caused every city we looked at to become less affordable, even though home values were down in some cities. More income is required to qualify for the average home in all 10 cities we looked at, including the four cities where home prices decreased.”

July 2023 Affordability Report

Ratehub.ca's July 2023 home affordability report.

As has been the trend in recent months, Vancouver buyers saw affordability deteriorate by the largest margin; a month-over-month increase in home values of $7,700, combined with the rising stress test means the average buyer saw their income requirements surge by nearly $9,000 over a one-month span.

“Again, Vancouver saw the biggest increase in home values month over month at $7,700. This combined with higher rates means within a single month, you now need an additional $8,970 in income to qualify for the average home. This is the largest increase of the 10 cities we looked at,” says Laird.

The Toronto real estate market, despite absorbing a month-over-month home price decrease of $10,100, came in fourth, with buyers needing $5,450 more in income.

The market saw affordability decline the least was Winnipeg; with the average home there selling for $900 less than in June, today’s buyer needs to earn $2,000 more to afford the average-priced home in the city.

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