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Exploding Home Prices Making Mortgages Harder to Qualify For

Sept. 19, 2020
4 mins
A woman comforts her distraught friend next to a laptop and paperwork

Existing homeowners may be rejoicing at the fact average home prices are headed for the stars.

Would-be purchasers, on the other hand, are curling up in the fetal position as their homeownership dreams turn nightmarish.

In Canada’s most competitive housing markets, home prices are once again running away from young buyers. The national average home price surged 18.5% to $586,000 in August vs. a year earlier. Some markets saw even steeper increases. Example: Prince Edward Island (+30.7%) and Ottawa (+19.9%).

But not all of Canada is so “lucky.” Prices were flat in most oil-producing regions (hey, “flat” is an accomplishment there), including places like Calgary, Edmonton, but also Atlantic cities such as St. John’s. More modest gains were seen in British Columbia (3.5-5.5%). How often do you see prices in PEI up 6-7 times more than in B.C.? Almost never is the answer.

Higher Prices = Higher Minimum Down Payments

Surging home prices mean surging down payments. That’s particularly punitive on first-time buyers who struggle to save up the minimum 5% down payment in many cases.

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This latest spurt in home prices translates into a 36% higher minimum down payment, from approximately $24,736 to $33,615. On a first-time buyer income of $60,000, for example, that’s 18 more months of saving, assuming one can sock away 10% of pre-tax income. And who knows if/how much higher prices will rise in that timeframe.

You may be asking, if home prices are up nearly 19% compared to last year, why would the minimum down payment rise by 36%?

Well, a while back our trusty Finance Department saw it fit to mandate higher down payments on purchases over $500,000. And in the past year, the average price has shot way above that $500k mark. While buyers need to put just 5% down for the first $500,000 of mortgage, they need to put down 10% for any portion from $500,001 to $999,999.

Homebuyers who want to avoid mortgage default insurance, which requires a minimum 20% down payment, are also being impacted. The average down payment needed to avoid default insurance has increased from $98,947 in August 2019 to $117,229 today.

What’s Driving Up Home Prices?

The Canadian Real Estate Association, which released the housing data this week, noted that there remain “ongoing housing supply shortages in so many parts of Canada.” That means more buyers competing for fewer property listings.

In fact, at last report there were just 2.6 months of housing inventory available. That’s insanely low—the lowest on record. This means it would take just 11 weeks to sell out Canada’s current housing inventory at the current sales pace.

“At the local market level, a number of Ontario markets are now into weeks of inventory rather than months,” CREA noted, drawing attention to the severity of the supply situation.

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Compare Mortgage Rates

Engaging a mortgage broker before renewing can help you make a better decision. Mortgage brokers are an excellent source of information for deals specific to your area, contract terms, and their services require no out-of-pocket fees if you are well qualified.

Here at RATESDOTCA, we compare rates from the best Canadian mortgage brokers, major banks and dozens of smaller competitors.

Where Will Prices Go from Here?

If you know, please tell us. Canada’s housing market has experienced a rebound that almost no one thought possible in March. Recessions haven’t been good for housing in the past, but this time was different. That’s true in large part due to COVID income subsidies and the government holding down interest rates.

While experts foresee a cooling off period for the remainder of the year, there’s no near-term sign of outright price declines.

“The pandemic completely disrupted normal seasonal patterns by shifting activity from the spring to summer,” wrote Robert Hogue of RBC Economics. “With pent-up demand now largely exhausted, we see activity cooling later this fall. This should let some of the steam out of prices, though not to the point of causing outright declines on a large scale.”

Marc Desormeaux at Scotiabank agreed, writing that the rebound in the housing market to date “lends further support to the argument that Canada is in the midst of a strong V-shaped recovery, though the pace of gains appears to be moderating with the post-lockdown reopening period now largely complete.”

Of course, experts may sing a different tune next month. It depends if real estate listings remain vise-tight like they have been. Watch inventory levels for clues.

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Source: CREA


The RATESDOTCA editorial team are experienced writers focused on sharing stories and bringing you the latest news in insurance and personal finance. Our goal is to provide Canadians with the information and resources they need to make better insurance and financial decisions.

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