The Canadian housing market appears to be well on the road to post-pandemic recovery, according to the latest May data.
The Canadian Real Estate Association (CREA) reports that a total of 54,241 homes sold across the nation last month, marking a 5.1% increase from April, and a 1.4% improvement from the same time frame last year; while scant, this is the first year-over-year growth recorded since June 2021, as buyer activity chilled due to rising prices and interest rates.
The national average home price also marked its first annual growth (+3.2%) in 12 months, rising to $729,044. That remains -10.7% – a dollar difference of $87,720 – below the market peak of $816,720 that occurred in February 2022.
The Aggregate Composite MLS HPI remains -8.6% below year-ago levels, though a smaller decline than seen in the last four months.
According to CREA, 70% of markets are experiencing a strong rebound in demand, including the Greater Toronto Area, Montreal, Greater Vancouver, Edmonton, and Ottawa.
Home affordability sees slight improvement compared to last year
Some good news for today’s active homebuyers; despite a higher national average home price, affordability has improved on an annual basis, as today’s market conditions are more comparable to last May’s, when the Bank of Canada’s hiking cycle was well underway.
The central bank has hiked its benchmark overnight lending rate, which sets the cost of borrowing for variable-rate mortgages, a historic nine times between March 2022 and June 2023, bringing it from a pandemic-era low of 0.25% to 4.75% today. Fixed mortgage rates have also soared over that time frame, as bond investors have reacted to steep inflation and overall economic volatility.
According to data compiled by Ratehub.ca, that in turn has elevated the stress test used to qualify mortgage borrowers to a range of 7.39%, compared to 6.77% last May. Combined with softer home prices in most markets across Canada, the overall affordability picture has actually improved.
“At this time last year, mortgage rates (and therefore the stress test) had already started to increase,” says James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender. “Hence, the dynamic of a far higher stress test year over year has started to disappear. With home prices lower in most cities, it’s not surprising that affordability has improved in May 2023 vs. May 2022.”
Ratehub.ca calculated the minimum annual income required to buy an average home in some of Canada’s major cities based on May 2023 and May 2022 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.
According to the findings, home affordability improved in eight out of 10 cities. Hamilton saw the biggest decline year over year, with $9,520 less income required, reflecting a drop in the city’s average home price of $105,200. Toronto came in fourth, requiring $3,450 less in income, with the average home price coming in $84,600 less than in May 2022. Vancouver was sixth, with buyers requiring an average of $590 less income, and home prices down $69,700 year over year.
Also read: Homebuyer affordability deteriorated in March as sellers’ market returns
Meanwhile, Calgary and Halifax were the only cities without home affordability improvements, with $7,420 in additional income required in Calgary and $3,400 in Halifax. This is because Calgary was the only city where the average home price actually increased year over year, up $13,600. Halifax had a minimal decline in average home price year over year, decreasing by $9,500.
“By the end of 2023 we expect affordability to be flat year over year, since both rates and home prices will eventually be close to even when compared year over year,” adds Laird.
Spring market continues to be defined by tight supply
The narrowing year-over-year gap may be short-lived however, as the tight supply of available homes for sale continues to put a boil under price growth, and support favourable seller conditions. CREA reports a total of 87,037 homes were brought to market over the course of the month. This marks a 6.8% improvement from April, indicating more sellers were indeed ready to participate in the traditional spring market, but remains a steep -13.6% below last year’s levels.
The sales-to-new-listings ratio (SNLR), which reflects the level of buyers competition in the market, came in at 67.9%; CREA considers a ratio between 40 - 60% to reflect a balanced market with above and below that threshold indicating sellers’ and buyers' conditions, respectively. The total months of supply – the measure used by CREA to determine long-term inventory – now sits at 3.1, down from 3.3 months in April, and nearly half a month below January levels; the long-term average for this time of year is about five months.
Most recent Bank of Canada hike could soften demand in coming months
Another factor impacting market recovery will be homebuyers’ ability to absorb further rate increases; the May numbers were recorded prior to the latest Bank of Canada announcement on June 7, in which the central bank increased its trend-setting rate by another 0.25%. In turn, the Prime rate increased to 6.95%, and today’s best variable mortgage rate has soared from a low of 0.85% back in January 2022 to 5.8% today.
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While many of today’s active buyers are coming to the table with their interest-rate expectations firmly in hand and budgets honed to factor in today’s steeper interest rate environment, this latest increase will impact the borrowers already on the margins. The resulting higher stress test will reduce the number of those who can qualify for a mortgage at today’s rates, particularly those who were already stretching their affordability. This could result in softening housing market activity in the coming months.
Mortgage-rate shock has also influenced sellers’ reluctance to list their homes, adds Shaun Cathcart, CREA’s Senior Economist; given many current homeowners locked into their mortgages when rates were at record lows, they’re hesitant to break or blend those mortgages now, as interest rates are drastically higher than they were two years ago, following the Bank’s rapid rate hiking cycle.
“A rebound in housing activity this year was never really in doubt because we knew the demand was there – the only question was around timing and that was answered this spring,” he stated in the association’s release.
“The 2023 housing puzzle piece that was less obvious was the reluctance of existing owners to take advantage of a slower market to make a move because they don’t want to mess with the ultra-low fixed rates they locked in during the COVID-19 pandemic. Without existing owners supplying the market with new listings, this housing demand rebound may play out more acutely than might have been expected on the price side this year.”