Mortgage rates have fallen slightly, but rising house prices are undermining improvements in housing affordability, a new analysis finds.
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 surveyed from January to February. Affordability improved from December to January as mortgage rates softened.
The average mortgage stress test, which requires prospective buyers to prove they can afford higher interest rates, was based on the average five-year fixed mortgage rate of 5.63% in February. decreased to 7.63%. However, increases in home prices offset increases in affordability.
“Two key variables, home prices and interest rates, have been moving in opposite directions since January. In 12 out of 13 cities, interest rates are falling and home prices are rising,” said Co-Chief Executive Officer of Ratehub.ca. James Laird, CEO and president of mortgage company CanWise, said in a statement.
“Home price increases were sufficient to reduce affordability in 11 out of 13 cities, even as interest rates fell.”
Ratehub.ca calculated the income needed to purchase an average-priced home based on a mortgage with a 20-year down payment, 25-year amortization, $4,000 in annual property taxes, and a $150 monthly heating bill. The mortgage rates used (5.71% in January and 5.63% in February) were the average of five-year fixed rates from the five largest banks at the time. Average house price data is from the Canadian Real Estate Association's Average House Price Index.
According to the analysis, the largest increase in the minimum income required to buy an average-priced home was in Toronto, where the average home price increased by $3,800 to $1.09 million, while the average home price increased by $28,100 to $1.09 million. It rose to $214,100. In Hamilton, the minimum income requirement rose $3,770 to $167,100 as the average home price increased $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 reached $1.18 million.
Victoria and St. John's were the two cities where income requirements decreased. In Victoria, the average house price rose by just $100 to $848,000, while the minimum income requirement was lowered by $1,060. The minimum income required to buy a home in St. John's dropped $1,000 as the average home price fell $3,200 to $328,800.
Laird noted that the change in income requirements is smaller than the change seen in previous months, as interest rates and house prices are moving in opposite directions. Ratehub.ca expects affordability to continue to decline as the market shows signs of strong demand for the spring season.
Economists are widely expecting the central bank to begin cutting interest rates soon after Canada's unexpected slowdown in annual inflation, raising expectations for a June rate cut.
A Desjardins report earlier this year predicted that lower interest rates would put prospective homebuyers on the sidelines, resulting in a broad-based rebound in home prices in the second half of 2024 that would spill over into 2025.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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