Average home prices across Canada are back on the rise, nearing the all-time high reached in March.

In October, the average selling price was $716,585, up 4.4% from September and an 18.2% jump from a year earlier, according to data released this week from the Canadian Real Estate Association (CREA).

While home sales were down 11.5% from last year’s record levels, they were up 8.6% from last month, marking the largest month-over-month gain since June 2020.

This all happened against the backdrop of housing inventory falling back to its record-low of 1.9 months, first reached in February of this year. This is how long it would take to sell through the current inventory at today’s rate of sales. The long-term average is approximately five months.

“I don’t think too many observers would have guessed the monthly trend would be moving up again heading into 2022,” said Shaun Cathcart, CREA’s senior economist.

“A month with more new listings is what allows for more sales because those listings are mostly all still getting gobbled up; however, with demand that strong, the supply of homes for sale at any given point in time continues to shrink,” he added. “It is at its lowest point on record right now, which is why it’s not surprising prices are also re-accelerating.”

Housing Affordability Worsening

And rising prices means a reduction in purchasing power for today’s home buyers.

Even before October’s jump in home prices—and prior to the increases in fixed mortgage rates seen over the past couple of months—affordability has been declining for the past three consecutive quarters, according to the National Bank of Canada’s Housing Affordability Monitor.

As of the third quarter, the average amount of time now needed to save up a down payment, based on a 10% savings rate of the median pre-tax household income, has risen to more than six years (74 months), NBC found.

While that’s the amount of time it would take to save a down payment based strictly on savings, CIBC economist Benjamin Tal reported last month that first-time buyers in Canada are also receiving down payment assistance from their parents to the tune of about $10 billion per year, or $82,000 per buyer.

“Although interest rates were essentially unchanged in the quarter and income continued to grow at a decent pace, a strong jump in home prices was more than enough to reduce affordability,” the report noted.

NBC economists added that fixed mortgage rates have risen by about 25 basis points in November and have the potential to climb further “as monetary policy normalization intensifies.”

“We estimate that a hypothetical 100-bps increase in rates represents approximately a 12% reduction in buying power for the same payment,” they wrote. “While this will be a headwind for home prices going forward, the recent evolution already represents a challenge for buyers entering the market not only for the monthly payment but also for the down payment.”

A Focus on Growing Housing Supply

While the issue of insufficient housing supply finally appears to be on the radar of policy-makers, there’s a lot of work yet to be done. 

When the Ontario government announced it would be launching a Housing Affordability Task Force the other week, it noted 2020 saw a 10-year high of 73,838 new housing starts, with comparative 2021 starts up an additional 16%.

However, a recent report by the Smart Prosperity Institute found an estimated 1 million new homes are needed in Ontario to adequately meet both current and future demand.

“This estimate of one million additional households should be taken as what could be expected in the absence of policy changes,” the report says.

Surge in Home Prices Could be Temporary

There may be good news for prospective home buyers who have been waiting for home price growth to ease.

Some market observers see last month’s jump in prices as being temporary rather than part of an ongoing trend.

“We’re unconvinced the more vigorous activity and price gains mark a change in direction for the market,” wrote RBC economist Robert Hogue. “We suspect it reflects a temporary uptick in demand driven by buyers rushing to land deals before interest rates rise.”

He added that, “deteriorating affordability (arising from soaring prices or higher interest rates, or both) and easing pandemic restrictions will gradually cool demand over the coming year.”