Canada Housing Market

Toronto’s real estate market remains notoriously expensive, with affordability continuing to decline despite a surplus of homes on the market. A recent report by Ratehub.ca highlights the staggering income required to comfortably afford an average home in Toronto. As of May 2024, buyers need to earn an annual salary of $215,920 to cover the costs of purchasing an average home, taking into account current home prices, interest rates, stress test rates, a 20% down payment, $4,000 in yearly property taxes, and $150 in monthly heating costs.

Affordability Challenges Worsen Across Canada

The May 2024 edition of Ratehub.ca’s study, which calculates the minimum annual income required to buy the average home in major Canadian cities, found that affordability worsened in 11 of the 13 markets studied. This analysis, based on national real estate data from April and May 2024, illustrates how changing mortgage rates and home prices impact the overall purchasing power needed to buy a home across Canada.

Rising Home Prices Offset Flat Mortgage Rates

Despite little upward pressure on borrowing costs – the average five-year mortgage rate remained fairly flat at 5.49% in May compared to 5.5% in April – rising home values have made affordability even more challenging. The mortgage stress test remains elevated at 7.49%, further squeezing potential buyers.

The income needed to buy a home rose most significantly in markets with homes priced below the $1-million mark. In these relatively more affordable markets, buyer activity remains higher compared to Canada’s more expensive cities, where extreme affordability issues have led to sluggish sales.

How Much Do You Need to Earn to Buy a Home in Canada?

According to Ratehub.ca’s May 2024 Affordability Report, the income required to buy an average home has increased in several cities. For instance:

• Hamilton: A home price increase of $9,400 means buyers now need to earn $1,550 more annually to afford an average-priced home, which is now $868,300.
• Victoria: A $7,600 increase in home prices requires buyers to earn an additional $1,230 annually, with the average home price at $874,300.

Interestingly, Toronto saw a slight improvement in affordability. Buyers now require $1,250 less in annual income to purchase an average home priced at $1,117,400. The supply and demand imbalance during the spring market led to a $5,900 decrease in the average home price between April and May.

Impact of the June Rate Cut

As Ratehub.ca’s May analysis was conducted before the Bank of Canada’s June rate cut, it remains to be seen how lower mortgage rates will impact home prices. Real estate boards, including the Canadian Real Estate Association, forecast an increase in sales in the coming months as buyers are encouraged by easing borrowing costs.

The recent quarter-point decrease, which lowered the central bank’s key Overnight Lending Rate from 5% to 4.75%, has had a small impact on borrowing costs. Further rate cuts in July or September could bring a renewed sense of urgency to the market, a phenomenon observed in previous rate cut cycles.

Conclusion

Toronto’s real estate market continues to present significant affordability challenges, with buyers needing an annual income of $215,920 to purchase an average home. As borrowing costs and home prices fluctuate, potential buyers must navigate a complex market landscape. The next Bank of Canada rate announcement, scheduled for July 24, 2024, will be closely watched for further developments.

Source: Rising home prices made it harder to afford a home in May | Ratehub.ca