2022 has had no shortage of real estate and mortgage news. The Bank of Canada started hiking the key overnight rate in March after two years of historic low rates. Fixed-rate mortgages increased by 66% on average between March and June alone.
The rising stress test is making homes less affordable
As mortgage rates have increased, so has the stress test rate. Home prices started trending downwards in some major cities. However, the annual income you need to buy a home has increased significantly across all cities that we reported on – by $18,000 on average, in just the last four months.
According to James Laird, Co-CEO of Ratehub.ca and President of Canwise mortgage lender, "In every city, homebuyers require a lot more income to purchase the average home due to higher stress tests caused by increasing mortgage rates. Generally, for every 1% that the stress test increases, a household qualifies for about 10% less mortgage." As a result, according to Laird, home prices will need to drop significantly further to offset the effects of the higher stress test. Unless that happens, home affordability will continue to be negatively impacted by the current rising rate environment.
How much more income do you need to afford a home in Canada?
Using March 2022 and June 2022 real estate data, Ratehub.ca has calculated the minimum annual income needed to buy a home in Canada’s major cities. The chart below shows how changing mortgage rates, stress test rates and real estate prices have impacted the income needed to buy a home.
Some key takeaways from our research include the following:
- Homebuyers would have to earn between $8,660 and $35,760 more in additional annual income to buy a home in June compared to March.
- While home prices were down for the month of June in cities like Toronto, Vancouver, Winnipeg, Ottawa and Hamilton, the income required to purchase a home in these markets still remains higher due to stress test rates.
- Victoria saw the biggest increase, with $35,760 in additional income required, with Vancouver close behind, requiring an additional $31,730.
The bottom line
Even as home prices begin to decrease across the country, rising mortgage rates continue to push the stress test upward, thereby making it more difficult for Canadians to afford a home. Since you will now be stress tested at your contract rate + 2% (because this will always be higher than the qualifying rate of 5.25%), it's especially important to shop around to get the best mortgage rate available.