Yahoo Finance Canada real estate: Income needed to buy a home falls nationwide in January
While purchasing a home remains out of reach for many Canadians, housing affordability improved across the country in January amid softening mortgage rates.
According to an analysis conducted by Ratehub.ca, the minimum income required to purchase an average-priced home fell in each of the 13 markets examined from December 2023 to January of this year. While home prices have fallen in some markets during that time, the study says the improvement in affordability was a result of softening mortgage rates that have also reduced the mortgage stress test. The mortgage stress test, which requires prospective buyers to prove they can afford payments at a higher rate, fell from 8.16 per cent in December to 7.71 per cent in January, Ratehub.ca says.
“The income required to purchase a home decreased in every city we looked at,” James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender, said in a statement.
“In cities where home prices increased, the drop in interest rates was enough to offset the price increases such that affordability still improved."
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 – 6.16 per cent in December and 5.71 per cent in January – 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 (CREA)'s average home price index.
The analysis showed that the largest decline in the minimum income required to buy an average-priced home was in Vancouver, dropping $9,620 to $227,780, as average home prices fell $7,400 to $1.16 million. Victoria saw minimum income requirements fall by $7,890 to $170,360, as average home prices dipped $10,200 to $847,900. In Toronto, the minimum income required to buy a home fell $7,800 to $210,300, while average home prices dropped $1,400 to $1.07 million.
Victoria saw the biggest percentage decline (-4.4 per cent) in income required across all markets, followed by Vancouver (-4.05 per cent) and St. John's (-3.79 per cent).
Even markets where prices increased between December and January saw income requirements drop. In Halifax, which saw the biggest monthly increase in the cost of a home as average prices jumped $6,900 to $518,500, the minimum income requirement fell $2,350 to $109,950. In Hamilton, average home prices increased $5,600 to $809,600, while income requirements fell $4,620 to $163,330.
But Ratehub.ca notes that the affordability break for buyers "could be short-lived", pointing to CREA data showing national buying conditions are tilting back in favour of sellers over buyers.
Economists widely expect that the central bank will begin cutting interest rates later this year. A recent Desjardins report says 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 carry into 2025. The strongest rebounds are expected in Toronto and Vancouver, “as they tend to be more responsive to interest rate movements.”
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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