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 November 2024, inflation now sits at 1.9%. 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 five times in a row from June to December 2024. These rate decreases have brought the Overnight Lending Rate down to 3.25% 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. 

December Canada affordability update 

Canada’s housing market grew more affordable in November, thanks largely to a series of interest rate cuts from the Bank of Canada. According to Ratehub.ca’s latest Affordability Report, the income needed to qualify for a mortgage declined in 12 out of the 13 cities surveyed. Between June and October, the central bank implemented four rate cuts, totalling a 125-basis-point reduction. As a result, the average five-year fixed mortgage rate edged down to 4.81%, lowering the mortgage stress test threshold to 6.81%.

Halifax led the pack in affordability gains, as the required income dropped by $2,370, following an $11,500 decrease in the city’s average home price to $527,700. Regina and Hamilton also saw notable improvements, with required incomes dropping by $1,460 and $1,130, respectively. In contrast, high-demand markets like Toronto and Vancouver saw only modest affordability gains of $520 and $860. 

Looking ahead, the Bank of Canada is expected to implement additional rate cuts in 2025, though at a slower pace and lower frequency than seen in 2024. While these cuts may continue to support affordability, surging buyer demand and scarce listings could limit how much market conditions improve in the coming months.

Read more: November home buying conditions improved due to falling rates

December Canada housing update

On December 16, 2024, the Canadian Real Estate Association (CREA) released its November housing market data, showing a notable rebound in activity. National home sales rose 26% compared to November 2023, with 37,855 transactions taking place. This represents the third consecutive month of rising sales, and a 2.8% increase from October. Major markets like the Greater Toronto Area, Vancouver, Calgary, and Montreal led the upswing, along with several smaller urban centers in Ontario and Alberta. 

The national average home price climbed 7.4% year-over-year to $649,411. The National Composite MLS Home Price Index (HPI) rose by 0.6% month-over-month — the largest such gain since mid-2023. These figures indicate that buyer competition is beginning to impact prices.

Despite a 2.4% annual uptick in new listings to 56,242 units, the inventory pipeline remains tight. Listings slipped 0.5% from October, pushing the months of inventory — a measure of how long it would take to sell all current listings at the current sales pace — down to 3.7 months, the lowest in 14 months. The sales-to-new-listings ratio also increased to 59.2%, nearing the upper limit of CREA’s balanced market range (45%–65%).

As rate cuts continue and new mortgage rules improve affordability, experts anticipate a robust winter market and a highly competitive spring selling season. If listings fail to keep pace with rising demand, further price increases and stronger seller’s market conditions could be on the horizon.

Read more: National home sales rise 26% in November

*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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