January proved a chilly month for Canada’s housing market with sales falling to the lowest for that month in 14 years.
Prices continued to fall as well. The MLS Home Price Index slipped 1.9 per cent from the month before, slightly more than the 1.6 per cent average decline in the prior five months, said RBC assistant chief economist Robert Hogue.
The index is now down 15 per cent from the market peak last February. Though data point to a nearby bottom for sales, “so far there are few indications the price correction has run its course,” said Hogue in a recent report.
Yet while home prices go down, the income Canadians need to buy them continues to go up.
According to data complied by Ratehub.ca, the required income needed to buy a home has increased in nine out of 10 major Canadian markets, compared with January 2022, thanks to large increases in fixed and variable-rate mortgages.
“Home prices are down, but affordability is worse than 12 months ago,” said James Laird, co-chief executive of Ratehub.ca and president of CanWise mortgage lender.
The Bank of Canada has raised its key interest rate to 4.50 per cent from a historic low of 0.25 per cent in less than a year. Commercial lending rates have also soared with the prime rate now sitting at 6.7 per cent and the stress test rate, needed by some to qualify for a mortgage, is at 7.37 per cent.
“The increase in rates is more material than the decrease in home values so far, which means homes are less affordable in nine out of 10 of the cities we looked at compared to a year ago,” said Laird.
In Victoria, B.C. for example, where affordability has declined the most, you now need another $25,500 of income to afford a home. One reason is that prices here have only fallen $11,800 over the past year, the smallest decline of all the cities studied. The total income needed for a home in this Vancouver Island city is $169,250.
Toronto, where the average home cost $1,078,900 in January, was near the bottom of the list for worsening affordability. Home owners here just need $7,620 more income than a year ago. But then the average home is worth $178,600 less. To own a home in Toronto, Ratehub.ca says, you need to make $207,000.
Prices for a home in Calgary actually increased by $29,400 over the past year, putting this western city third on the list of places where affordability is getting worse. Required income went up $20,310 to a total of $105,680.
The only city where affordability improved was Hamilton, Ont., where buyers now need an average of $4,350 less income to afford a home. This was because the average home price is down $202,900 from last year, the biggest decline of all the cities studied.
Ratehub.ca says comments from the Bank of Canada have raised “cautious expectations” that interest rates have reached their peak, but that’s a hard call to make.
Recent data — 150,000 jobs gained in Canada and higher than expected inflation in the U.S. — have raised doubts about whether central banks will be able to stop now.
The economists at Desjardins say while they are sticking with their base case that the Bank of Canada holds it rate for now “there is a significant risk that central bankers are forced to raise rates further.”
“Given the better start to the year for the economy, we have pushed back the timing of the first rate cut in Canada,” they said in a note. “In the U.S., we continue to see the Federal Reserve raising the policy rate into the second quarter of the year, and there is a risk of further tightening if inflation doesn’t cooperate.”
Stay tuned. The Bank of Canada makes its next rate decision March 8.