“Greater Toronto home sales recorded a staggering 37 percent increase last month compared to the same period a year ago. This surge in activity can be attributed to lower borrowing costs associated with fixed-rate mortgages, enticing buyers back into the market. However, a new analysis has shed light on a crucial aspect that may be dampening the excitement surrounding this surge.
Mortgage rates have indeed softened slightly, but rising home prices have essentially nullified any improvements in housing affordability. According to Ratehub.ca’s analysis, the minimum income required to purchase an average-priced home increased in 11 out of the 13 markets examined between January and February. This shift comes after a period where affordability had shown signs of improvement due to lower mortgage rates.
Income requirements and affordability
The analysis took into account the average mortgage stress test, which dictates that prospective buyers must demonstrate their ability to make payments at higher rates. While the stress test dipped to 7.63 percent in February, based on an average five-year fixed mortgage rate of 5.63 percent, the increase in home prices has offset any gains in affordability.
The fluctuation in income requirements varied across different cities, with Toronto experiencing the largest jump in the minimum income needed to purchase an average-priced home. On the other hand, cities like Victoria and St. John’s saw a decline in income requirements, showcasing some diversity in the market landscape.
Looking ahead
Despite the fluctuations in income requirements, Ratehub.ca anticipates a continued decline in affordability as demand strengthens during the upcoming spring season. Economists are predicting that the central bank will soon start cutting interest rates, with expectations of a possible cut in June. This move could potentially bring more homebuyers into the market and result in a broad-based rebound in home prices in the latter half of 2024 extending into 2025.
In conclusion, while the surge in home sales in Greater Toronto is certainly a positive sign for the market, the challenges related to affordability should not be overlooked. Buyers must navigate a landscape where rising home prices largely offset any benefits from lower mortgage rates. As we look towards the future, it will be crucial to address these affordability concerns to ensure a healthy and sustainable real estate market in the long run.”
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