Dropping mortgage rates improved home affordability in August

As interest rates start to lower across Canada, so too are the affordability hurdles facing home buyers. The effects of the first two borrowing rate cuts from the Bank of Canada – implemented in June and July – made it slightly easier to purchase a home in most of the nation’s housing markets, according to the latest affordability data compiled by Ratehub.ca.

The August edition of the report, which calculates the minimum annual income required to buy an average priced home in Canada’s major cities, found affordability conditions improved in 12 of the 13 markets studied compared to the previous month. The report analyzes real estate data from August and July 2024, along with changing mortgage and stress test rates, to see how buying conditions are evolving on a month-over-month basis.

As mortgage rates continued to drop in August, the average five-year fixed rate (which is used as a basis for the study) fell to 5.16% from 5.29% in July. The average mortgage stress test rate – which adds 2% to the contract mortgage rate – also came in at 7.16%, down from 7.29%.

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

For the second consecutive month, Toronto led the way in terms of improved affordability, as the required income to purchase a home in the city fell by $4,850, to $204,100. This was largely due to a drop in the average home price in August, which came in at $1,082,200 – a decrease of $15,100 from July. Prices have been declining over the summer in Toronto as sales have remained lacklustre; the most recent report from the Toronto Regional Real Estate Board (TRREB) showed transactions were down -5.8% annually in August, led by an -11.4% plummet in the condo sector.

Rounding out the top three were Victoria and Vancouver, which also saw affordability improve in line with softening home prices, down by $5,900 and $1,800, respectively.

In fact, the only housing market to see affordability worsen by a small margin was St. John’s, where the required income rose by $160. This can be attributed to an increase in the average home price in the east coast city, which rose by $4,900, to $354,600. While also experiencing a slower month for sales, tight inventory in the province of Newfoundland has helped keep prices firm.

Rate cuts, new mortgage rules, to reheat housing market

Real estate affordability is set to improve further across Canada, as more rate cuts are anticipated from the Bank of Canada; at least another two in 2024, and another four to six in the new year. That will materially bring borrowing costs lower, as well as the mortgage stress test. The next interest rate announcement from the central bank is scheduled for October 23, 2024.

This is the last month of data before the effects of the third Bank of Canada rate cut, which was implemented in September, will be captured. Real estate activity remained sluggish in August, particularly in Canada’s largest markets, which softened home prices and helped improve overall affordability. It will be interesting to see how real estate demand evolves in the fall, as buyers react to the cumulative 75-basis-point decrease.

Brand new mortgage qualification rules unveiled last week by the federal government will also give the market a boost. The changes, which increased the insured mortgage purchase price cap to $1.5 million and extended amortization periods to 30 years for all first-time home buyers and new build purchases, are expected to reduce the down payment hurdle for buyers, particularly those in Canada’s priciest markets.

As a result, the real estate market is poised to heat up as these mortgage rules for first-time buyers come into effect. While this will improve affordability conditions for Canadians, it will also likely push real estate prices higher, as sidelined buyers return to the market. 

Also read:

• 30 year amortizations for all first-time home buyers, insured mortgages up to $1.5 million
• Canadian real estate remained in “holding pattern” in August
• Rate cuts improved home affordability across Canada in July
• GTA home prices eased in August as condo sales plummet
• Bank of Canada cuts target interest rate by 0.25% in September 2024 announcement