Home affordability improved across Canada as mortgage stress test eased in January
January 2024 home affordability report
Penelope Graham, Director of Content
Will 2024 usher in a new era of home affordability? The latest numbers reveal that – at least in the short term – buying conditions have improved, as both home prices and mortgage rates softened in January.
Data compiled by Ratehub.ca on the minimum annual income required to purchase the average home in major Canadian cities found qualification requirements eased in each of the 13 markets studied.
“The income required to purchase a home decreased in every city we looked at,” James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender.
“In cities where home prices increased, the drop in interest rates was enough to offset the price increases such that affordability still improved."
The report is based on national real estate data from January 2024 and December 2023 and illustrates how changing mortgage rates, stress test rates and real estate prices are impacting the income needed to buy a home.
A lower stress-test hurdle
According to the numbers, softening mortgage rates have effectively pulled down the mortgage stress test, which tacks 2% onto borrowers’ contract rates. Mortgage applicants must prove they have the financial capacity to carry their mortgages at this higher rate; a requirement that has made it considerably tougher to qualify for home financing as rates soared over the last 24 months.
In January, the mortgage stress test fell to 7.71%, from 8.16% in December, based on an average mortgage rate of 5.71%.
Also read: How to stress test your mortgage
Home prices down in nearly half of markets
Chilled home prices, which were down in seven of the 13 markets, also effectively moved the dial for borrowers. The largest improvement was seen in Vancouver, where the average home price declined by $7,400 to $1,161,300, resulting in $9,620 less income required to purchase a home.
Toronto ranked third in terms of improved affordability, as the average home priced dipped by $1,400 to $1,065,800. As a result, a borrower looking to buy a home there requires $7,800 less in income than they would have in December.
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 January 2024 and December 2023. Average home prices are from the CREA MLS® Home Price Index (HPI).
Early-year data points to heating market
However, a warmer-than-expected January market could mean this affordability break for buyers could be short lived. The numbers out from the Canadian Real Estate Association reveal sales rose by 22% year over year, the largest annual gain seen since May 2021.
That’s piling pressure onto already-scant supply; national buying conditions have started to tilt back in favour of sellers with a sales-to-new-listings ratio of 58.8%. CREA considers a ratio between 40 - 60% to reflect balanced market conditions, with above and below that threshold indicating sellers’ and buyers’ markets, respectively. On an annual basis, the average national home price rose by 7.6% to $659,395, though was flat on a monthly basis, at 0.9%.
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Penelope Graham, Director of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.