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 climbed, 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 September 2024, inflation now sits at 1.6%. As inflation appears to be on the decline both in Canada and in the United States, 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 three times in a row with  quarter-point rate cuts in June, July, and August. These rate decreases have brought the Overnight Lending Rate down to 4.25% from its previous 5%. They 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 below the Bank’s 2% 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. 

October Canada affordability update 

Homebuyers across Canada saw improved affordability in September 2024, as three Bank of Canada rate cuts since June helped ease borrowing costs. The average five-year fixed mortgage rate dropped to 5.04%, and the stress test rate followed suit, falling to 7.04%. This, combined with softer home prices in key markets, made homeownership more accessible for many.

The Ratehub.ca Affordability Report shows that 11 of 13 major markets experienced improved conditions. Vancouver saw the most significant improvement, with the required income to purchase a home decreasing by $5,000, as the average home price dropped to $1,179,700. Toronto also saw a notable improvement, with required income falling by $4,300 due to a $13,500 dip in home prices.

However, not all markets followed this trend. St. John’s saw affordability worsen, with home prices rising by $9,500, requiring an additional $1,000 in income. Montreal also faced a modest increase, with required income rising by $350.

Looking ahead, potential future rate cuts in October and December could further lower borrowing costs, providing additional relief to homebuyers and likely stimulating the housing market in the coming months.

Read more: Home affordability improved in September following summer rate cuts

October Canada housing update

Steadily dropping interest rates are beginning to lure buyers back into the Canadian housing market, with national real estate data from September showing a notable increase in activity. The Canadian Real Estate Association (CREA) reported 37,733 homes sold during the month, a 6.9% increase year-over-year and up 1.9% from August.

The uptick in sales follows the Bank of Canada’s quarter-point interest rate cut on September 4, lowering the national benchmark borrowing cost to 4.25%. CREA’s Senior Economist, Shaun Cathcart, noted similar activity boosts after the central bank’s June and July cuts, but many buyers may now be waiting for further rate reductions expected in the coming months.

September’s activity also led to a modest rise in home prices, with the national average price increasing 2.1% annually to $669,630. The MLS Home Price Index (HPI), which tracks the most typical home prices by filtering out extreme high- and low-end sales, rose 0.1% month-over-month but remains 3.3% lower than last year.

The supply of new homes listed for sale also surged, up 4.9% from August, marking a significant influx of sellers. However, the total available inventory remains below historical averages, with 4.1 months of supply on the market.

Overall, the Canadian housing market remains balanced, with a sales-to-new-listings ratio of 51.3%, slightly below the long-term average. CREA forecasts stronger market momentum starting in 2025, fueled by anticipated rate cuts. They predict home sales will rise 5.2% in 2024, with stronger gains of 6.6% by 2025, as interest rates continue to decline.

Read more: National home sales rise in September following summer rate cuts

*National home data sales data for September is not yet available, as home sales data for a given month is not published until the following month. September's data will become available in mid-October 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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