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Homebuyer affordability deteriorated in March as sellers' market returns

Penelope Graham

Call it a spring awakening, or perhaps higher interest rates becoming the norm; homebuyers are indeed returning to the market, with the national March housing data revealing a monthly uptick in both sales and prices.

According to the Canadian Real Estate Association (CREA), a total of 41,636 homes traded hands across the nation in March, representing a 1.4% increase from February, and the first back-to-back monthly gains in over a year. While that still comes in -34.4% below 2022’s record month, that year-over-year spread is narrowing, compared to the -40% yearly drop recorded last month.

The national average home price is also on the rise, coming in at $686,371; down -13.7% from last year, but up 2% from February, with homes selling for $75,000 more than they did at the start of the year. This was largely fuelled by price recovery in the Greater Toronto Area and BC Lower Mainland; stripping these regions out would reduce the national average by $136,000. 

Rising prices were also reflected in the Home Price Index (HPI), a measure that removes the extreme highs and lows from the market to more accurately represent the typical home transaction. CREA reports the index saw a month-over-month increase of 0.2% – its first since February 2022. Overall, the HPI now sits 15.5% below year-ago levels, a smaller decline than in February.

As the national association states, “The trend of prices stabilizing from February 2023 to March 2023 was very broad-based. With few exceptions, prices are no longer falling across most of the country, although they’re not rising meaningfully anywhere, either.”

However, the supply challenges we’re seeing play out in Canada’s largest markets appear to be a national trend, with the number of homes brought to market falling -5.8% on a monthly basis. That’s heaping the pressure back on buyers, with a sales-to-new-listings ratio leaping back up to 63.5% – officially marking a sellers’ market once again. That’s the tightest real estate conditions have been in a year, notes CREA, and higher than the long-term average of 55.1%. Overall, there were just 3.9 months of inventory on a national basis by the end of the month, down from 4.1 months at the end of February – the lowest level since October and more than a full month below the average for the month.

Home affordability continues to deteriorate across Canada

While the March numbers reveal home prices remain deeply below last year’s levels, that hasn’t been much of a help to homebuyers' budgets; analysis from Ratehub.ca  finds that elevated mortgage rates continue to wipe out any price relief offered by lower home values.

The study calculates the minimum annual income required to buy an average home in Canada’s major cities based on March 2023 and March 2022 real estate data, and illustrates how changing mortgage rates, stress test rates and real estate prices are impacting the income needed to buy a home. It finds that in nine out of 10 cities, affordability has worsened, with homebuyers needing to earn between $5,650 and $21,360 more in additional annual income to afford a home – a trend that’s only expected to worsen given tightening sellers’ market conditions.

“With supply of new listings tight and some home buyers returning to the market, don’t expect home affordability to improve in the coming months,” says James Laird, Co-CEO of Ratehub.ca and President of CanWise mortgage lender. 

“While home prices are down significantly in the majority of the cities we looked at, the income required to purchase a home still remains higher due to higher mortgage and stress test rates.”

According to the findings:

  • Vancouver saw the biggest increase year-over-year, with $21,360 in additional income required.
  • Hamilton was the only city to see home affordability improve year-over-year with $4,460 less income required due to a drop in average home price of $224,200, the largest annual decline of all the cities.
  • Toronto came in eighth in terms of eroding affordability; while the average home price has dropped $216,500 year-over-year, increased mortgage stress test requirements means the average buyer must earn $6,250 more this March than last.

March housing affordability analysis.

*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 March 2023 and March 2022. Average home prices are from the CREA MLS® Home Price Index (HPI).

The bottom line

While it’s looking increasingly likely that the Bank of Canada has finished its rate-hiking cycle, paving the way for stabilizing mortgage rates, borrowing costs are still steeply higher than they were a year ago. Given buying conditions are already starting to heat back up in Canada’s largest markets, and supply remains at a record low, pressure will continue to build under prices.

As Shaun Cathcart, CREA’s Senior Economist, put it, “The 2023 spring housing market is getting going after a tough 2022, and the green shoots continued to pile up in March. Sales are trending up, markets have tightened considerably, the Bank of Canada is on hold, and the MLS® Home Price Index is stabilizing across the country. That said, the supply issue is still with us. New listings are at 20-year lows.” 

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