If you’re a homebuyer and the explosion in Canadian housing prices has you worried, you’re not alone.
Prices have rallied steeply in recent months, and that’s a problem — for young buyers who need a mortgage, that is.
The combination of record-high home values and a stubborn stress test rate that just won’t fall is hurting housing affordability...a lot. That's despite plunging discounted mortgage rates.
In fact, based on Canada’s minimum stress test rate, the average new buyer's mortgage payment is higher than it’s ever been.
Explainer: The minimum stress test rate is the government-mandated interest rate that lenders make you prove you can afford to get approved for a mortgage.
Fortunately for most people, individual incomes have also risen a bit (based on StatsCan hourly wages). That offsets some of the theoretical payment increase in recent years. That is, for people who still have a job.
That last point can’t be taken for granted, by the way. In its latest Housing Assessment Report, the Canada Mortgage and Housing Corporation (CMHC) noted that disruptions caused by the pandemic have “weakened some of the fundamental determinants [of housing prices],” primarily steep declines in employment and hours worked, which lowered income in most regions. Those lower incomes are dashing the dreams of mortgage approval for hundreds of thousands of Canadians as we speak.
On a share of income basis, the average mortgage payment is still below the last peak in April 2017. So that's a small positive, albeit of little consolation for young homebuyers. (Note: RATESDOTCA calculates average payments over time based on typical 5-year fixed mortgage rates, CREA’s national average home price and a 20% down payment.)
Worldwide, Canada ranks towards the upper end of the house-price-to-income measure as reported by the International Monetary Fund. We’re sitting at 111%. Luxembourg is at the high end at 128%, while Italy is near the bottom at 92%. (A villa in Tuscany, anyone?)
Coincidentally or not, CMHC has sounded alarm bells in its recent affordability assessment. The agency wrote that there’s evidence of “moderate housing vulnerability” at the national level. It said there were signs of overheating in Hamilton, Ottawa, Montreal, Quebec City and Moncton, as of the second quarter of the year. There were also moderate signs of overvaluation in Victoria, Moncton and Halifax. Not only does that have many homebuyers paying extreme prices, but it's increasing their risk at the same time — e.g., if prices correct in 2021 and they lose some/all of their income.
“The evidence of rising imbalances in some local housing markets coupled with the general weakening of housing market fundamentals results in a moderate degree of overall vulnerability being maintained for the Canadian housing market,” the report reads.
“In line with action taken by the Bank of Canada in March to support the economy, the nominal 5-year mortgage rate declined” this year, CMHC noted.
Despite an 18.5% explosion in home values year-over-year, that’s kept the typical new homebuyer’s mortgage payment at an estimated $2,471, just below the April 2017 peak of $2,480. Not much of a silver lining but it's something.