With the Bank of Canada taking a break and spring approaching, the first signs of improving affordability are appearing. Affordability remains an issue, however. The impact of the correction in house prices and the rise in household incomes will need a boost from mortgage rates.
According to the most recent reading from the National Bank, housing affordability improved in Canada in the fourth quarter of 2022, for the first time in nine quarters. The drop, from 2.1 percentage points, is intended to be “not only the most significant improvement for more than three years, but also the end of the longest sequence of decline in affordability since the 1986-1989 episode”.
The explanation comes from a decline in housing prices for a second consecutive quarter, at the fastest pace since 1990, and the continued rise in personal and household incomes. This was enough to offset the 17 percentage point increase in the benchmark five-year mortgage rate used in the calculation in the fourth quarter, to its highest level since 2008, the institution’s economists point out.
Having said that, “this does not mean that the median housing is now affordable in Canada, since the mortgage payment as a percentage of income stood at 64.6%, the second highest level since 1981” .
For Montreal, the improvement was 1.6 percentage points, to reach 47.2%. However, this mortgage payment burden remains historically high, remaining well above the 20-year average of 30.7% for this city. It was 51.8% for a residential property not held in the form of a condominium, 35.9% for a condo. “This rate is still 12.4 percentage points above the level recorded a year ago, due to the 7.2% increase in house prices during this period and the soaring rates of interest”, add the economists of the National.
For a first-time buyer, with a representative home price of $575,170 for a non-condo and $398,420 for a condo, it took 52 and 32 months respectively to accumulate the initial down payment assuming a savings rate by 10%.
In Quebec City, affordability improved by 0.5 percentage points, to 31.2%, but also remained well above the long-term average of 23% for that city. For a first-time buyer, at the price of a representative dwelling of $373,172 in the non-condo and $253,390 in the condo, it took 29 and 19 months respectively to raise the initial down payment.
When will rates drop?
We expect house prices and mortgage rates to continue to fall, which, combined with rising incomes, will accelerate the improvement in housing affordability, they say. But when should we expect a first contribution from mortgage rates?
The dominant scenario calls for the Bank of Canada’s policy rate to remain at its current level for much of 2023, while inflation is brought under control and the anchoring of inflationary expectations is brought back to the target range of 1-3 % of the central bank.
In their latest forecasts, Desjardins Group economists point out that the residential sector will continue to deteriorate this year under the effect of the erosion of household borrowing capacity. They show that, if we consider the purchase of a property at an average price of $465,000 in Quebec, with a down payment of 10% and an amortization of 25 years, monthly mortgage payments jumped, on average , to $2,550 at the end of 2022 from the low of $1,350 reached in the first six months of the pandemic. “It’s no surprise that first-time buyers, who generally have a small down payment, are significantly less likely to buy property. […] These accounted for about half of property purchases before the rise in interest rates,” they point out.
As for the bigger picture, an analysis of Equifax Canada’s fourth quarter 2022 data shows that the average mortgage holder is paying nearly $170 more in monthly mortgage payments than before the pandemic, an amount that is expected to further increase. “Other variable rate products, such as the home equity line of credit, are also being heavily impacted, with minimum monthly payments rising 24% from pre-pandemic levels. »
According to Desjardins projections, the decline in the average price of residential properties, which has already been 8.1% in Quebec since the April 2022 peak, should reach 17% by the end of 2023. mortgage rates, we should expect the start of a decline next year, with a mortgage rate starting at 6.19% for a one-year term and ending 2024 at around 4.74% (based on a fixed weighted average and variable). The rate on the three-year term would go from 6.14% to 4.94% in the interval and that of five years, from 6.49% to 5.99%. As for the prime rate, which influences the rent for consumer credit, the institution’s forecasts bring it to around 4.45% at the end of 2024, compared to 6.7% at the end of the third quarter of 2023.