Bank of Canada rate cuts lead to improved home affordability in October
October 2024 Ratehub.ca Affordability Report
Steadily dropping mortgage rates made buying a home slightly more affordable in most of Canada in October; according to the latest Affordability Report compiled by Ratehub.ca, the amount of income needed to qualify for a mortgage on the average-priced home decreased in 12 of 13 cities.
The monthly report, which references national real estate and mortgage data, illustrates how changes to mortgage rates, the mortgage stress test, and real estate prices, impact housing affordability in real time. Overall, affordability conditions have been improving since June, when the Bank of Canada first started cutting its benchmark interest rate, easing mortgage costs and the pricing of other borrowing products.
The October edition reveals that the average five-year fixed mortgage rate used in the study fell by 18 basis points, down to 4.86% from 5.04% in September. As a result, the mortgage stress test – which tacks 2% onto the borrowers’ contract rate – came in at 6.86%, down from 7.04% last month.
October 2024: How much do you need to earn to buy a home in Canada?
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 October 2024 and September 2024. Average home prices are from the CREA MLS® Home Price Index (HPI).
For the second month in a row, Vancouver-area home buyers saw the largest improvement in affordability, with the average buyer requiring $4,540 less in income to qualify for a mortgage. This was largely due to home prices dipping slightly in the west coast city; the average price fell by $7,700 to $1,172,000. Toronto was a close second, with the required income dropping by $4,380. This was based on the average home price falling $8,500 to $1,060,200.
While both of these cities saw a robust increase in sales activity in October, they remain well supplied, which has helped keep a lid on price growth. That paved the way for recent interest rate cuts to further improve affordability, without being offset by rising home prices.
However, these softer home prices were concentrated in Canada’s largest and priciest markets. Booming buyer activity and shrinking supply has pushed home prices higher in many of the nation’s smaller cities; six out of 13 markets experienced month-over-month price increase. However, in all cases but one, the drop in mortgage rates was enough to counter rising prices.
Fredericton was the only city that saw affordability worsen, with $1,890 more income required to purchase the average home. This was due to the significant home price increase of $16,100. This was driven by a strong uptick in sales in October, with year-over-year activity coming in 12% higher across the province, and leading to the same-sized increase in the benchmark home price.
What’s next for mortgage rates?
The good news for borrowers is that mortgage rates are largely expected to trend lower; the Bank of Canada is anticipated to cut its trend-setting Overnight Lending Rate (OLR) once again in December, likely by another quarter-point. That would bring this benchmark interest rate down to 3.5%, and, in turn, pull down the pricing for prime rates and variable mortgage rates, and other market-linked borrowing products such as Home Equity Lines of Credit (HELOCs).
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Economist consensus expects several more rate cuts to come in 2025, until the OLR reaches an end point of about 2.5%. Of course, cheaper interest rates will draw more buyers into the market, which may quickly heat prices; a scenario the Canadian Real Estate Association forecasts, calling for a 5.2% rise in sales by the end of this year compared to last, and another 6.6% increase in 2025. The national average home price is expected to end the year largely flat at $683,200 – just a 0.9% increase – before rising 4.4% next year to $713,375.
Dropping rates raise questions for renewals and switches
As well, while dropping mortgage rates is generally good news for borrowers, resulting market volatility can make it tough for mortgage shoppers who are trying to time the market to secure the best rate – particularly those coming up for renewal. Working with a mortgage professional, such as a broker, is a good way to navigate today’s uncertain rate environment, and create a borrowing strategy unique to each shopper, such as switching to a new lender, trying out a different type of mortgage term, or changing from a fixed-rate mortgage to a variable-rate one.
The next Bank of Canada rate announcement is scheduled for December 11, 2024.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.