Canada housing affordability and market trends

Canada housing affordability

It’s no secret that buying a home in Canada has become increasingly difficult over the last few years. This has been fuelled by rock-bottom rates thanks in part to two oversized rate cuts in March 2020 by the Bank of Canada, which brought the cost of borrowing at the time from 1.75% to just 0.25%. As a result, demand for housing boomed during the pandemic and sent home prices soaring. This price growth was part of a larger problem: runaway inflation, which peaked at a 40-year high of 8.1% back in June 2022.

In order to tamp down inflation to its target rate of 2%, the Bank of Canada, whose mandate it is to keep inflation under control, implemented a series of 10 rate hikes from March 2022 to July 2023, which sent borrowing costs soaring and bond yields climbing. As a result, both variable and fixed mortgage rates rapidly climbed, and many housing markets across Canada saw home sales plummet, with home prices also falling in most markets.

However, the Bank of Canada’s aggressive rate hiking cycle is now paying off; as of June 2024, inflation now sits at 2.7%. As inflation appears to be on the decline both in Canada and in the United States, the central bank is now in a position to ease borrowing costs. It has kicked off this new lower-rate era by cutting its trend-setting Overnight Lending Rate twice in a row with two quarter-point rate cuts in June and July, respectively. These rate decreases have brought the Overnight Lending Rate down to 4.5% from its previous 5%. They also immediately brought down variable mortgage rates and the rates on home equity lines of credit (HELOC). Bond yields have fallen in response, putting downward pressure on fixed mortgage rates.

While mortgage rates and home prices remain elevated, there is reason to believe that, so long as inflation continues to trend downward towards the Bank’s 2% target, mortgage rates will continue to decline. Whether that leads to improved home affordability in Canada remains to be seen, as lower rates could reignite demand, leading to real estate price growth across the country once again. 

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 July 2024 and June 2024. Average home prices are from the CREA MLS® Home Price Index (HPI).

August Canada affordability update - national

July ushered in some slight relief for Canadian home buyers. According to the latest home affordability data released by Ratehub.ca, borrowing conditions improved across Canada, due in large part to lower interest rates (and therefore lower stress test rates) following the Bank of Canada’s two consecutive -0.25% policy rate cuts in June and July.

The report illustrates how changing mortgage and stress test rates, combined with real estate prices, impact the minimum income required to qualify for a mortgage in each market.

According to the findings, home prices decreased in all of the 13 markets studied (the first time this has happened since January). Meanwhile, the mortgage stress test also declined, falling from 7.47% in June to 7.29% in July.

The greatest improvement in affordability was seen in Toronto, where the average home price fell by -$13,300, resulting in $5,410 less income required to purchase an average home.

Vancouver followed in second place for improved affordability. The average home price in Vancouver tumbled by -$9,400, meaning that you’d need -$5,020 less income to purchase an average home there.

Read more: Rate cuts improved home affordability across Canada in July

August Canada housing update - national

On August 15, 2024, the Canadian Real Estate Association (CREA) released the most recent statistics for the Canadian housing market for the month of July 2024. The most recent data reveals that the housing market in Canada was relatively slow in July, as buyers hold out for lower rates now that the Bank of Canada is firmly in a rate cutting cycle. A total of 43,485 homes changed hands over the course of July, down by -0.7% on a monthly basis, though still 4.8% up from the same period last year.

“While it wasn’t apparent in the July housing data from across Canada, the stage is increasingly being set for the return of a more active housing market,” said CREA Chair James Mabey. “At this point, many markets have a healthier amount of choice for buyers than has been the case in recent years, but the days of the slower and more relaxed house hunting experience may be somewhat numbered.”

In a trend seen throughout 2024, new supply continues to positively inundate the market, with the number of new listings increasing by 12.7% year over year. This new supply, combined with relatively sluggish demand, was enough to cause the average home price to decline. The average national home price in Canada came in at $667,317, down by -0.2% from this time last year.

Relatively subdued market activity and an abundance of new listings has seen the sales-to-new-listings ratio (SNLR) fall further into the balanced end of the spectrum, coming in at 52.7% in July. According to CREA, a SNLR between 45 - 65% indicates a balanced market, with above and below that threshold indicating buyers’ and sellers’ markets, respectively.

“With another rate cut announced on July 24, we’ve now seen two rate cuts in a row, and the expected pace of future policy easing has steepened considerably, with markets now anticipating rate cuts at every remaining Bank of Canada decision this year,” said Shaun Cathcart, CREA’s Senior Economist. “Combine that with a record amount of demand waiting in the wings, and the forecast for a rekindling of Canadian housing activity going into 2025 has just gone from a layup to a slam dunk.”

Read more: July home sales fizzle as buyers await more rate cuts 

*National home data sales data for August is not yet available, as home sales data for a given month is not published until the following month. August's data will become available in mid-September upon publication of home sales figures by CREA.  

Benchmark price vs. average price

When reporting on housing price trends, real estate boards use two different metrics: the average home price, and the benchmark home price. These two measures provide different insights into price trends, and how the market is evolving in both the short and long term.

• The average home price is calculated by adding the sale price of all the homes sold over a period of time, and then divided by the number of transactions. This provides the average price per unit. However, because the mix of the home sold can fluctuate significantly from month to month or by year, average home price trends can be more volatile, and do not always offer an accurate portrayal of the most common home sale in a given market.
• A benchmark home price is based on an index that’s been developed based on specific housing features, and how they change in terms of demand and value to home buyers over time. This provides a more accurate picture of the most typical type of home sold in a specific market, and that has changed over time. An example of a benchmark home price in the MLS Home Price Index created and used by the Canadian Real Estate Association (CREA). This is based on more than 15 years of CREA’s proprietary MLS System data, as well as statistical models to determine the “typical” home type and value per market.

What is the SNLR?

The “SNLR” stands for sales-to-new-listings ratio. It is a measure used by real estate boards to gauge the level of competition within a given housing market, and whether or not it's considered to be a “balanced” market, or more favourable to buyers or sellers. The SNLR is calculated by dividing the number of home sales by the number of newly-listed homes brought to market during a period of time. For example, if there were 500 home sales in a specific city during the month of March, and 750 homes brought to market, the SNLR would be:

(500/750)*100 = an SNLR of 66%

According to the Canadian Real Estate Association:

• A ratio of 45 - 65% is considered a balanced market. This means there is a sufficient supply of homes available for sale to meet home buyer demand. These conditions help keep home price growth stable, and buyers are less likely to encounter excessive multi-offer situations that can drive prices higher.
  
  
• A ratio below 45% is considered to be a buyers’ market. This means there is an oversupply of available homes for sale and not enough buyer demand. Home prices tend to decrease in buyers’ markets as homes often sell for less than they’re listed, and multi-offer situations are less common.
  
  
• A ratio above 65% is considered to be a sellers’ market. This defines a market where there are too few homes available for sale to satisfy buyer demand, and competition to purchase listings is fierce. Home prices are driven higher in sellers’ markets as buyers must often engage in bidding wars on the same property.

How the stress test impacts mortgage qualification

The mortgage stress test is a mortgage qualification requirement that ensures borrowers could still afford to make their payments in the case that interest rates should rise. Mortgage applicants must prove they could still afford their mortgage under the higher of the following two scenarios:

• The mortgage rate they receive from their lender, plus 2%.
  
• The Minimum Qualifying Rate (MQR), which is currently 5.25%. However, given there are no contract mortgage rates currently available at 3.25% or lower, this threshold is obsolete, and will remain so unless Canadian mortgage rates considerably decrease. 

For example, let’s say you get a mortgage rate of 5% from your mortgage lender. You would actually need to have the sufficient borrowing criteria – such as income, debt ratios, and down payment size, etc. – to qualify for a mortgage at 7%. 

The mortgage stress test also reduces the size of mortgage borrowers will qualify for. This is because when you have a higher mortgage rate, it results in a higher monthly payment to cover the additional cost of borrowing.

For example, let’s say a borrower has a household income of $100,000, and buys a home priced at $454,161, with a down payment of $50,000. However, because the borrower must qualify at a rate of 7.64%, the purchase price they’d actually qualify for would be just $387,670 – a difference of $66,691.

Mortgage calculators