Yahoo Finance Canada real estate: Affordability falls as income needed to buy a home increases
While mortgage rates have softened slightly, rising home prices have eroded improvements in housing affordability, a new analysis has found.
According to an analysis conducted by Ratehub.ca, the minimum income required to purchase an average-priced home increased in 11 of the 13 markets examined between January and February. Between December and January, affordability had improved amid softening mortgage rates.
The average mortgage stress test, which requires prospective buyers to prove they can afford payments at a higher rate, dipped to 7.63 per cent in February, based on an average five-year fixed mortgage rate of 5.63 per cent. But an increase in home prices has offset the gains in affordability.
“The two key variables, which are home values and interest rates, have moved in opposite directions since January; interest rates are down and home values are up in 12 out of 13 cities,” James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender, said in a statement.
“The increase in home values was enough such that affordability decreased in 11 of 13 cities despite the drop in rates.”
Ratehub.ca calculated the income required to purchase an average-priced home based on a mortgage with a 20-year downpayment, 25-year amortization, $4,000 in annual property taxes and $150 for monthly heating. The mortgage rates used – 5.71 per cent in January and 5.63 per cent in February – were the average of the Big Five banks' five-year fixed rates at the time. Average home price data were from the Canadian Real Estate Association's average home price index.
The analysis showed that the largest increase in minimum income required to buy an average-priced home was in Toronto, rising $3,800 to $214,100, as average home prices jumped by $28,100 to $1.09 million. Hamilton saw minimum income requirements increase by $3,770 to $167,100, as average home prices rose $26,300 to $835,900. In Vancouver, the minimum income required to buy a home increased by $2,570 to $230,350, as home prices hit $1.18 million.
Victoria and St. John’s were the two cities where income requirements declined. Victoria saw minimum income requirements fall by $1,060, as average home prices increased by just $100 to $848,000. The minimum income required to purchase a home in St. John’s fell by $1,000, as average home prices slipped by $3,200 to $328,800.
Laird notes that the fluctuations in income requirements are less than the swings seen in previous months, due to interest rates and house prices moving in opposite directions. Ratehub.ca expects that affordability will continue to decline, as the market is showing signs that the spring season will bring about strong demand.
Economists widely expect that the central bank will begin cutting interest rates soon, with a surprise slowdown in Canada's annual inflation rate bolstering expectations of a June cut.
A Desjardins report from earlier this year said that lower interest rates are expected to bring prospective homebuyers off the sidelines, resulting in a broad-based rebound in home prices in the second half of 2024 that will spill over into 2025.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
Download the Yahoo Finance app, available for Apple and Android.
