Homes in Canada 'slightly easier to afford' this summer, despite rate hikes: Ratehub

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For sale sign is displayed outside a home in Toronto, Ontario, Canada June 15, 2021. REUTERS/Carlos Osorio
Ratehub says housing affordability improved over the summer as the impact of higher mortgage rates was partly offset by a meaningful decline in home prices. REUTERS/Carlos Osorio

Housing affordability in Canada modestly improved over the summer months as the jump in borrowing rates was partially offset by a significant decline in home prices, according to rate comparison site Ratehub.ca.

The analysis took into account mortgage rates, the stress test and average home prices, and showed the amount of annual income needed to buy a house in 10 major Canadian cities fell across the board from June to August.

"Homes in every city we looked at are slightly easier to afford than they were two months ago. This is because rates have remained unchanged, while home prices have softened," James Laird, co-chief executive officer of Ratehub.ca and president of mortgage lender CanWise, said in a release on Friday.

Toronto saw the biggest improvement, where yearly income required to afford a home fell $12,550 to $213,950 in August over the two-month period. Ratehub says data from the Canadian Real Estate Association (CREA) showed the average home price in the city dropped $80,300 to $1,124,600 over that timespan.

Hamilton, Ont. came in second, with buyers needing an annual income of $167,500 to buy a property in August, $11,560 less compared to June.

In Vancouver, the yearly income required to buy a home was $223,850, down $8,100 in August compared to June.

Ratehub came up with the data using the assumption of a mortgage with a 20 per cent downpayment and 25-year amortization. It also factored in $4,000 in yearly property taxes and a $150 monthly heating bill. The mortgage rates used were an average of the five-year fixed rates offered at Canada's big five banks.

As interest rates rise, home sales activity has fallen with buyers sitting on the sidelines. The decline in demand is putting downward pressure on property values.

CREA reported that nationwide home sales fell one per cent in August from July, marking the sixth straight monthly decline.

"August saw national sales hold steady month-to-month for the first time since February which, along with a stabilization of demand/supply conditions in many markets, could be an early sign that this year's sharp adjustment in housing markets across Canada may have mostly run its course," said Jill Oudil, chairperson of CREA, in a Sept. 15 press release.

"That said, some buyers may choose to remain on the sidelines until they see clearer signs of borrowing costs and prices also stabilizing."

The Bank of Canada deployed another 75 basis point hike this month, raising its benchmark rate to 3.25 per cent. It has warned of more rate increases to come.

Economists at TD Bank and Scotiabank predict the central bank will raise its benchmark rate to around four per cent eventually.

Laird says if the Bank of Canada continues to hike rates and home prices fall further, then affordability will improve. However, if rates rise and home prices find a floor, affordability will diminish, he said.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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