Canadian Real Estate Affordability Got Worse With Higher Rates, What Gives?

Canadian real estate prices are falling with higher mortgage rates, but has it made it easier to buy? Bank of Canada (BoC) data for December’s new uninsured mortgage loans shows the highest rates in well over a decade. Interest costs are rising faster than prices are falling, meaning worse affordability. The hiccup is due to the speed at which rates increased, and affordability is expected to improve in the coming months.

Canadian Mortgage Rates Have Surged To The Highest Level In Over A Decade

Mortgage rates are on the climb, which isn’t news to anyone in Canada. It’s the speed they climbed that’s remarkable. Average interest on a new mortgage jumped 0.24 points to 5.53% in December. It was 3.53 points higher than a year before, more than doubling the record low recently experienced. Canada hasn’t seen a mortgage rate this high since the Great Recession. 

Canadian Mortgage Rates Have Been Surging Higher

The average rate paid on new residential mortgages in Canada.

Source: Statistics Canada; Better Dwelling.

Prices have yet to reflect the full increase in mortgage rates, despite coming down from peak. Home prices peaked in March 2022, the same month the BoC began raising rates. Over that time, prices dropped 17.5% (-$151,300) from the record high to the latest December 2022 mortgage data release. It’s a big discount, and helps when it comes to those prohibitively high down payments. 

However, the industry is quick to point out this hasn’t helped with affordability. Monthly mortgage payments for a benchmark home at the average contract rate went from ~$3,150 to ~$3,650. It’s a sharp increase for less than a year, especially if you’re on a budget or a cashflow negative investor. 

A common take shared by mortgage professionals is that the total cost of a house is much higher. Using the lifetime cost of principal and repayment, and averaging the contract rate, the math checks out. A peak benchmark home would cost $915,000 over 25 years, while one in December 2022 is closer to $1,275,000. Not much of a price drop in the end, eh? There are a few caveats here though, even ignoring the lack of feasibility when it comes to using stimulus rates for the whole mortgage life.

Rising Interest Rates Take Time, and The BoC’s Rush Doesn’t Change That

The BoC fell behind the curve, raising rates significantly later by misreading inflation. Their own research shows a move in rates requiring 18 to 24 months to be fully reflected at market. If we assume January 2023 was the last hike, that means the impact won’t be fully seen until the middle of next year. If rates keep climbing, as many prominent economists are forecasting, even later. 

Just because the BoC started late doesn’t mean it can cram in the time lost by a bad read. That take is the central banker’s equivalent of needing to look good this weekend, so you do 5,000 sit ups and hope it cancels out the past two years of gains. Hopefully it happens, but it won’t. The market needs time, just like it took time to become bloated.

Matching the March 2022 peak-price payment affordability requires a big drop. Mortgages at December 2022 levels require a benchmark home to drop 12.5% to fall to $630,000. That’s a level well within range from Oxford Economics and Fitches’ forecast. Even BMO and RBC are around there. That helps with the issue of down payments, but payments weren’t “affordable” at peak.

Affordability isn’t always achieved by falling prices or cheaper mortgages though. Many firms see price stagnation, and higher wages working together. This would see the real cost of housing fall, even if sticker prices don’t. By creating a stable price environment, the real (inflation-adjusted) burden drops. 

Higher rates also shift demand to end-users. Since low mortgage rates reduce operating costs and increase leverage, it attracts investors. The intentional introduction of excess demand helps to increase competition, and price growth. Investor demand also displaces buyers, since they’re better financed. An RBC executive stressed this point when he explained investors replaced first-time buyers in their portfolio. Yeah, we’ve reached the point where banks discuss excess credit. 

Did higher rates make housing cheaper? Not yet, the opposite happened—as anticipated. Though cheap financing doesn’t really help end-users when they face prohibitively high down payments and are outbid by investors with more leverage and incentive, fueled by those rates. 

As higher rates work their way through the economy, affordability will improve with healthier demand.



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  • Ray 1 year ago

    With higher rates and stress tests put on top. Hardly anyone will qualify for a 7% to 8 % mortgage.
    Either by unaffordabilty or ability to qualify. Many are screwed

    • Average Man 1 year ago

      It’s almost like prices would have to drop…

      • M W 1 year ago

        Not going to happen until sellers have a reason to drop the prices. They need to lose their income or have a big expense hit them en masse. People aren’t going to sell their houses unless they need to.

        • Pat 1 year ago

          Their reason for selling is getting their investments underwater and losing money months by months,

          Alot of investors were already losing money months to months but the appreciation made it still worth it.

          Now on top of that they are bleeding 10s of thousands a months.

          And alot can’t afford it as it was their retirement plan so they feel immense pressure to stop the bleeding already.

  • Bout Ngor Bout 1 year ago

    I’m clever because I’m just listening three years almost

  • Joshua Oberon 1 year ago

    Smart column, thanks. Consider also that “price stagnation and higher wages working together” is the ideal, and we’ll need to wait and see if wages can actually experience an upward movement to the extent needed. Wage growth will have to be substantial, and expectations of a sluggish economy in future quarters may defer this a bit. Oh, and lest we forget, robust immigration bogeys will add no small headwind for wage growth – a lot of new folks to assimilate into a less than robust economy perhaps. Good luck!

  • Pb 1 year ago

    it’ll be easier to buy once the market get’s flooded with listings from panicking mom and pop investors trying to save some of their retirement money by selling asap, causing a massive correction like we’ve never seen before.

  • FckPtn 1 year ago

    Everyone’s been clamoring for interest rate hikes and now that it’s finally hit, we’re suddenly surprised that it wasn’t the answer? It’s as if higher interest costs make it harder for would be home buyers to finally get into the market.

  • Randy 1 year ago

    Still don’t understand the goal here, housing has gone crazy thanks to all these people buying million dollar houses. These same people have the means to pay even more than the over priced listing and have the means to outbid any other interested party by 50 to 500k ? Or more ? Where did all this extra money come from ? Obviously raising interest rates won’t have any effect on this massive group of buyers. So with these interest hikes plus these people outbidding the normal person, any chance of the house with a white picket fence is gone .. for at least 5 to 6 years. By then the damage done, through renewals, credit consolidation, will ruin 25% of home owners. No correction to the things causing us pain, food prices, utilities, Helco credit. Tax on top of tax, carbon tax, property tax increases, word to the wise, move in with your parents and forget this whole mess. It’s not worth it, It appears our country is headed into third world country status. Money by the wheelbarrow to buy milk, homeless, we can’t have it all when only the top 1% can afford it. This is the stuff that spurns mass unrest, is that next ?

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