Is the tide turning for homebuyers?
Interest rate cuts by the Bank of Canada in recent months have helped reduce ownership costs for homeowners and buyers and bring about a slight improvement in the overall housing outlook, according to a new analysis by Royal Bank of Canada (RBC) assistant chief economist Robert Hogue.
At the start of 2024, home prices in Canada leveled off or slightly declined in some markets. Fixed mortgage rates also began to ease as the Bank of Canada (BoC) prepared for potential rate cuts. Furthermore, steady wage growth helped stop the unprecedented surge in homeownership costs during the pandemic.
Hogue said the central bank’s June decision to reduce its key interest rate solidified these trends, making it easier for buyers to qualify for a mortgage. For example, purchasing an average home priced at $810,200 in Canada required an income of $155,000 in the second quarter of 2024, down from $161,000 at the end of 2023.
However, the financial hurdle for homeownership is still steep, especially compared to pre-pandemic levels. In 2019, an income of $96,000 would have sufficed to buy a similar home. The $155,000 required in 2024 is nearly double the estimated median household income in Canada, making homeownership unattainable for most.
The affordability issue isn't uniform across the country, however. Markets like Vancouver and Toronto have the steepest barriers, with required incomes of $273,000 and $226,000, respectively. Meanwhile, homeownership is more accessible in regions like Saint John, Regina, and Winnipeg, where incomes of around $75,000 to $81,000 are enough.
Housing affordability is expected to improve further. The BoC is projected to lower its policy rate by an additional 125 basis points, bringing it to 3% by spring. This should lower mortgage rates and provide some relief to potential buyers.
Additionally, changes in mortgage rules could benefit first-time homebuyers, as the federal government allows 30-year amortizations on insured mortgages starting in December. This would reduce monthly mortgage payments by about 8%, restoring some of the affordability lost in recent years.
However, longer amortizations will lead to higher interest costs, and widespread use of this option may increase demand and push prices up in certain markets. The affordability improvements by the end of 2025 will depend on balancing these factors.
