Elevated home prices and now higher interest rates are continuing to pose an affordability challenge for today’s homebuyers.

Although the average national home price has decreased since reaching its peak in February, monthly payments have actually increased due to a combination of larger loan sizes and rising interest rates, according to data from Equifax Canada.

While affordability concerns are an issue impacting all consumers, it’s one that’s being felt especially by first-time buyers.

“The cooling housing market in Canada should not be mistaken for increasing affordability,” said Rebecca Oakes, Vice-President of Advanced Analytics at Equifax Canada. “Affordability depends not just on home prices, but also on monthly payment obligations for a mortgage. Higher interest rates coupled with high inflation can really stretch a consumer’s monthly expenditure, while many could find it difficult to qualify for a mortgage.” 

As of the second quarter, the average loan amount for new mortgages in Canada was $367,500, while the average loan for first-time homebuyers was $430,700, Equifax said. In Toronto and Vancouver, the average loan amount for first-time homebuyers is above $600,000, despite prices having eased in both markets.

Equifax noted that the slowdown in rising prices is “positive” from an affordability standpoint, but that significantly higher interest rates are continuing to push monthly payments higher. The average loan amount for first-time homebuyers was down just 0.5% in the second quarter, yet their average monthly payments increased by 10%.

Despite today’s challenges, affordability is expected to improve

Housing affordability as measured by National Bank of Canada has now been on a downward trend for 11 consecutive quarters.

“We remain in the midst of the longest sequence of declining home affordability since the 1986-1989 episode,” wrote economists Kyle Dahms and Alexandra Ducharme in NBC’s Housing Affordability Monitor.

They say a mortgage on a representative home in Canada now takes 67.3% of a household’s income to service.

Rising interest rates from the Bank of Canada were largely responsible, with the 5-year benchmark mortgage rate used to calculate affordability up an additional 75 bps in the third quarter. That translates into an extra $300 in monthly payments on an average mortgage, all else equal, they said.

But some relief may be on the horizon, now that certain fixed rates have started to decline in recent weeks following the sharp drop in bond yields, along with an expectation that the Bank of Canada is now reaching the end of the current rate-hike cycle.

The National Bank economists noted that cumulative home price declines from February’s peak and into 2023, combined with a stabilization of the benchmark 5-year mortgage rate, “should improve affordability in the coming quarters.”