The Bank of Canada’s aggressive interest rate hikes this year were designed to rein in raging inflation overall, with lowering housing prices in its target as well, ostensibly adding to affordability..It has had the exact opposite result, says a new study from Charles St-Arnaud, chief economist at Alberta Central..Cooling housing markets and rising interest rates has become an "affordability tug-of-war" and higher rates are winning, says St-Arnaud. .According to the Canadian Real Estate Association’s (CREA) price index, home prices have declined, on average, by 10% nationally since the bank started its tightening regime in March, taking the rate from .25% to 4.25%..That massive hike has had a huge impact on how much more homeowners are paying on their mortgages..On the national average home price of $756,000 (source: CREA) a household is paying $24,200 more in interest a year, says St-Arnaud..In Canada’s pricier markets, the Greater Vancouver Area and the Greater Toronto Area, homeowners are paying $37,400 and $36,300 more, respectively. .Increases in other major markets include $10,900 in Winnipeg, $12,900 in Edmonton, $16,500 in Montreal and $16,700 in Calgary. .Toronto now has its worst housing affordability on record, says St-Arnaud, adding Montreal, Ottawa and Vancouver are now at their most unaffordable level since 1981, when interest rates were around 20%. .The required income to purchase a benchmark home in Canada has increased by about $12,600 since February. .In Toronto, a household needs an income of $254,200 to afford the average house, $15,400 more than in February. .In Vancouver, the required income is $252,800, about $21,700 more than in February. .Nationally, Canadian households are now spending, on average, 29.6% of their income on mortgage payments, almost three percentage points higher than in February and the highest since 1990. ."The Canadian housing market remains overvalued by many metrics and the increase in interest rates over the past year has only made matters worse," says St-Arnaud..Home prices would need a precipitous decline to return to affordable status..According to St-Arnaud's calculations, prices would need to fall another 35% to 40% in Toronto, Vancouver, Ottawa and Montreal to restore affordability to where it stood over the past decade..The equations very, depending on where the bar is set, says St-Arnaud. .“If you use Vancouver's long-term average as the measure, a city that has always been pricey, and assume that housing has become permanently more expensive in Canada, then only Vancouver and Toronto would need a drop in price to restore affordability,” he says. .With interest rates unlikely to decline over the coming year, St-Arnaud expects housing prices will fall further, with darker clouds potentially forming in the near future: a recession and higher unemployment..The higher costs of owning a home mean many households rely on two incomes to stay afloat.."The concern is that job losses would lead to households not being able to service their debt anymore," says St-Arnaud. “A wave of forced selling could exacerbate any price declines expected in 2023 and lead to an increase in defaults.".After the bank took its rate to 4.25%, Canada's biggest commercial lenders quickly followed suit, hiking their prime rate by .5% to 6.45%, putting additional pressure on qualifying for a mortgage. .The mortgage stress test puts the qualifying rate at 5.25% or the borrower's offer rate plus two per cent, whichever is higher..Bloomberg reports major banks such as Royal Bank of Canada and Toronto-Dominion Bank have posted mortgage rates slightly below prime. With this latest hike, advertised variable mortgage rates are likely to move to the low 6% range, pushing the stress-test rate to more than 8%..During the housing boom, when the bank dropped its rate to .25%, variable rate mortgages were at about 1.5% and qualifying rates didn't get anywhere that figure, but with the 4% increase this year, they have pushed past it, says BMO senior economist Robert Kavcic.."The key now will be how long rates stay at these levels. The longer we stay in 5.25-per-cent-plus mortgage rate territory, the more the pressure will build," says Kavcic.
The Bank of Canada’s aggressive interest rate hikes this year were designed to rein in raging inflation overall, with lowering housing prices in its target as well, ostensibly adding to affordability..It has had the exact opposite result, says a new study from Charles St-Arnaud, chief economist at Alberta Central..Cooling housing markets and rising interest rates has become an "affordability tug-of-war" and higher rates are winning, says St-Arnaud. .According to the Canadian Real Estate Association’s (CREA) price index, home prices have declined, on average, by 10% nationally since the bank started its tightening regime in March, taking the rate from .25% to 4.25%..That massive hike has had a huge impact on how much more homeowners are paying on their mortgages..On the national average home price of $756,000 (source: CREA) a household is paying $24,200 more in interest a year, says St-Arnaud..In Canada’s pricier markets, the Greater Vancouver Area and the Greater Toronto Area, homeowners are paying $37,400 and $36,300 more, respectively. .Increases in other major markets include $10,900 in Winnipeg, $12,900 in Edmonton, $16,500 in Montreal and $16,700 in Calgary. .Toronto now has its worst housing affordability on record, says St-Arnaud, adding Montreal, Ottawa and Vancouver are now at their most unaffordable level since 1981, when interest rates were around 20%. .The required income to purchase a benchmark home in Canada has increased by about $12,600 since February. .In Toronto, a household needs an income of $254,200 to afford the average house, $15,400 more than in February. .In Vancouver, the required income is $252,800, about $21,700 more than in February. .Nationally, Canadian households are now spending, on average, 29.6% of their income on mortgage payments, almost three percentage points higher than in February and the highest since 1990. ."The Canadian housing market remains overvalued by many metrics and the increase in interest rates over the past year has only made matters worse," says St-Arnaud..Home prices would need a precipitous decline to return to affordable status..According to St-Arnaud's calculations, prices would need to fall another 35% to 40% in Toronto, Vancouver, Ottawa and Montreal to restore affordability to where it stood over the past decade..The equations very, depending on where the bar is set, says St-Arnaud. .“If you use Vancouver's long-term average as the measure, a city that has always been pricey, and assume that housing has become permanently more expensive in Canada, then only Vancouver and Toronto would need a drop in price to restore affordability,” he says. .With interest rates unlikely to decline over the coming year, St-Arnaud expects housing prices will fall further, with darker clouds potentially forming in the near future: a recession and higher unemployment..The higher costs of owning a home mean many households rely on two incomes to stay afloat.."The concern is that job losses would lead to households not being able to service their debt anymore," says St-Arnaud. “A wave of forced selling could exacerbate any price declines expected in 2023 and lead to an increase in defaults.".After the bank took its rate to 4.25%, Canada's biggest commercial lenders quickly followed suit, hiking their prime rate by .5% to 6.45%, putting additional pressure on qualifying for a mortgage. .The mortgage stress test puts the qualifying rate at 5.25% or the borrower's offer rate plus two per cent, whichever is higher..Bloomberg reports major banks such as Royal Bank of Canada and Toronto-Dominion Bank have posted mortgage rates slightly below prime. With this latest hike, advertised variable mortgage rates are likely to move to the low 6% range, pushing the stress-test rate to more than 8%..During the housing boom, when the bank dropped its rate to .25%, variable rate mortgages were at about 1.5% and qualifying rates didn't get anywhere that figure, but with the 4% increase this year, they have pushed past it, says BMO senior economist Robert Kavcic.."The key now will be how long rates stay at these levels. The longer we stay in 5.25-per-cent-plus mortgage rate territory, the more the pressure will build," says Kavcic.
