Canada housing affordability and market trends

Canada housing affordability

It’s no secret that buying a home in Canada has become increasingly difficult over the last few years. This has been fuelled by rock-bottom rates thanks in part to two oversized rate cuts in March 2020 by the Bank of Canada, which brought the cost of borrowing at the time from 1.75% to just 0.25%. As a result, demand for housing boomed during the pandemic and sent home prices soaring. This price growth was part of a larger problem: runaway inflation, which peaked at a 40-year high of 8.1% back in June 2022.

In order to tamp down inflation to its target rate of 2%, the Bank of Canada, whose mandate it is to keep inflation under control, implemented a series of 10 rate hikes from March 2022 to July 2023, which sent borrowing costs soaring and bond yields climbing. As a result, both variable and fixed mortgage rates rapidly roseclimbed, and many housing markets across Canada saw home sales plummet, with home prices also falling in most markets.

However, the Bank of Canada’s aggressive rate hiking cycle is now paying off; as of December 2024, inflation now sits at 1.8%. As inflation appears to be stable in Canada, the central bank is now in a position to ease borrowing costs. It has kicked off this new lower-rate era by cutting its trend-setting Overnight Lending Rate six times in a row from June 2024 to January 2025. These rate decreases have brought the Overnight Lending Rate down to 3.00% from its previous 5%. The cuts also immediately brought down variable mortgage rates and the rates on home equity lines of credit (HELOC). Bond yields have fallen in response, putting downward pressure on fixed mortgage rates.

While mortgage rates and home prices remain elevated, there is reason to believe that, so long as inflation remains within the Bank’s 2-3% target, mortgage rates will continue to decline. Whether that leads to improved home affordability in Canada remains to be seen, as lower rates could reignite demand, leading to real estate price growth across the country once again. 

January 2025 Canada affordability update 

According to Ratehub.ca’s latest Affordability Report, nine out of 13 major Canadian cities experienced better mortgage affordability in 2024. The primary driver was the Bank of Canada’s decision to lower its benchmark interest rate from 5% to 3.25% between June and December, which made both fixed and variable mortgage rates more attractive. By the end of the year, the average five-year fixed rate had fallen from 5.71% to 4.99%, and the mortgage stress test rate dropped from 7.71% to 6.99%.

Even though 11 of the 13 cities recorded higher average home prices, the drop in borrowing costs still made homeownership easier in many places. For instance, Toronto buyers needed $12,400 less in annual income than they did at the start of the year, partly due to a slight dip in average home price (from $1,065,300 to $1,061,900) and partly because interest rates came down. Over in Vancouver, buyers required $12,100 less, despite a small price increase from $1,166,800 to $1,171,500. However, four cities didn’t see these benefits; Fredericton was hit the hardest, with homebuyers needing $6,130 more income as home prices surged by $54,000.

Looking ahead to 2025, economists predict more rate cuts by the Bank of Canada, which could keep mortgage costs on a downward trend, especially for variable-rate borrowers. That said, fixed-rate mortgages, which are tied to bond market activity, may not budge as much if economic uncertainties like possible trade tariffs and inflation persist. 

Read more: Lower rates improved housing affordability across most of Canada in 2024

January Canada housing update

On January 15, 2025, the Canadian Real Estate Association (CREA) released its December housing market update, highlighting a seasonal cooling after a strong autumn. Home sales totalled 27,643, reflecting a 5.8% drop from November but a significant 19.2% increase compared to December 2023, signalling continued recovery. Quarterly sales (October to December) rose 10%, marking one of the strongest quarters in recent years outside of the pandemic-related activity.

The national average home price increased 2.5% year-over-year to $676,640 but dipped 2.2% month-over-month. The MLS Home Price Index (HPI), a stable measure of home prices, posted a slight 0.2% annual decline, pointing to stabilizing price trends.

Inventory stood at 128,000 homes by year-end, up 7.8% year-over-year but below the long-term average of 150,000. New listings fell 1.7% from November to 29,128, while months of inventory edged up to 3.9, indicating tight conditions leaning toward a seller’s market. The sales-to-new-listings ratio (SNLR) remained balanced at 56.9%. CREA expects a dynamic spring market in 2025, driven by lower interest rates and an increase in listings.

Read more: Canadian real estate ends 2024 with chilly sales

*National home data sales data for December is not yet available, as home sales data for a given month is not published until the following month. December's data will become available in mid-January upon publication of home sales figures by CREA.  

Benchmark price vs. average price

When reporting on housing price trends, real estate boards use two different metrics: the average home price, and the benchmark home price. These two measures provide different insights into price trends, and how the market is evolving in both the short and long term.

• The average home price is calculated by adding the sale price of all the homes sold over a period of time, and then divided by the number of transactions. This provides the average price per unit. However, because the mix of the home sold can fluctuate significantly from month to month or by year, average home price trends can be more volatile, and do not always offer an accurate portrayal of the most common home sale in a given market.
• A benchmark home price is based on an index that’s been developed based on specific housing features, and how they change in terms of demand and value to home buyers over time. This provides a more accurate picture of the most typical type of home sold in a specific market, and that has changed over time. An example of a benchmark home price in the MLS Home Price Index created and used by the Canadian Real Estate Association (CREA). This is based on more than 15 years of CREA’s proprietary MLS System data, as well as statistical models to determine the “typical” home type and value per market.

What is the SNLR?

The “SNLR” stands for sales-to-new-listings ratio. It is a measure used by real estate boards to gauge the level of competition within a given housing market, and whether or not it's considered to be a “balanced” market, or more favourable to buyers or sellers. The SNLR is calculated by dividing the number of home sales by the number of newly-listed homes brought to market during a period of time. For example, if there were 500 home sales in a specific city during the month of March, and 750 homes brought to market, the SNLR would be:

(500/750)*100 = an SNLR of 66%

According to the Canadian Real Estate Association:

• A ratio of 45 - 65% is considered a balanced market. This means there is a sufficient supply of homes available for sale to meet home buyer demand. These conditions help keep home price growth stable, and buyers are less likely to encounter excessive multi-offer situations that can drive prices higher.
  
  
• A ratio below 45% is considered to be a buyers’ market. This means there is an oversupply of available homes for sale and not enough buyer demand. Home prices tend to decrease in buyers’ markets as homes often sell for less than they’re listed, and multi-offer situations are less common.
  
  
• A ratio above 65% is considered to be a sellers’ market. This defines a market where there are too few homes available for sale to satisfy buyer demand, and competition to purchase listings is fierce. Home prices are driven higher in sellers’ markets as buyers must often engage in bidding wars on the same property.

How the stress test impacts mortgage qualification

The mortgage stress test is a mortgage qualification requirement that ensures borrowers could still afford to make their payments in the case that interest rates should rise. Mortgage applicants must prove they could still afford their mortgage under the higher of the following two scenarios:

• The mortgage rate they receive from their lender, plus 2%.
  
• The Minimum Qualifying Rate (MQR), which is currently 5.25%. However, given there are no contract mortgage rates currently available at 3.25% or lower, this threshold is obsolete, and will remain so unless Canadian mortgage rates considerably decrease. 

For example, let’s say you get a mortgage rate of 5% from your mortgage lender. You would actually need to have the sufficient borrowing criteria – such as income, debt ratios, and down payment size, etc. – to qualify for a mortgage at 7%. 

The mortgage stress test also reduces the size of mortgage borrowers will qualify for. This is because when you have a higher mortgage rate, it results in a higher monthly payment to cover the additional cost of borrowing.

For example, let’s say a borrower has a household income of $100,000, and buys a home priced at $454,161, with a down payment of $50,000. However, because the borrower must qualify at a rate of 7.64%, the purchase price they’d actually qualify for would be just $387,670 – a difference of $66,691.

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