Why it’s getting more expensive to buy a house
House prices are falling, but it is more expensive to buy a house now compared to February’s peak.
High interest rates, pushed aggressively by the Bank of Canada to quell inflation, drove mortgage rates up dramatically. Even though the average sale price for all types of homes in the Toronto area has fallen from a peak of $1.33 million in February to $1.09 million in September, those higher borrowing costs are now offsetting price drop.
To qualify for a $1.33 million house in February with a five-year fixed rate mortgage at 2.5%, one needed a household income of $235,000 with a 20% down payment, said Wins Lai, a real estate agent and broker in Toronto.
The income needed to benefit from a fall in house prices in September has actually increased. A five-year fixed-rate mortgage is now 5.5%, which means an income requirement for an average $1.09 million home is $237,250 with a 20% down payment, a- she added.
In short, the price of the house in this scenario has dropped by $247,000. The income required to buy it has increased by $2,250.
“Given the recent spike in borrowing costs, it’s no surprise that buyers are qualifying for fewer homes even though prices are down,” Lai said. “I expect this will cause buyers to move up the property ladder at a slightly slower pace given that buyers are likely to make higher down payments to reduce required loan amounts.”
The impact of higher rates has yet to run its course,” said Robert Hogue, senior economist at Royal Bank of Canada. In fact, buying a home has never been so unaffordable in Toronto, according to a recent report by Royal Bank of Canada.
The Bank of Canada is expected to raise interest rates by three-quarters of a percentage point by the end of the year, intensifying ownership costs for the rest of 2022. It is the spike in interest rates that greatly reduces accessibility, Hogue said.
Although drastic declines in home prices may help potential buyers enter the market, current monthly mortgage payments are still about the same as homeowners paid in February, said sales representative Tom Storey. and Team Leader at Royal LePage Signature Reality in Toronto.
“Lower prices but higher interest rates have yet to make monthly payments more affordable,” he said. “All it did was make those who were about to enter the market enter the rental market and those who wanted to sell and reduce their investments lose their investment in their property.”
In Toronto, people currently spend about 83% of their income on real estate fees, according to the RBC report. Affordability is measured by spending no more than 30% of total income on housing.
According to this measure, the average price of a house would have to be $659,683 on an income of $150,000 (with a five-year fixed rate mortgage and a 20% down payment) for the household to spend only 30% of income upon home ownership. costs, Lai said.
“There’s very little chance for Toronto to enter the affordable realm,” Hogue said. “It’s a global city. People come here and ask for more land to build or buy. If there is demand, prices will always prevail.
In the mid-1990s, after a major correction in the housing market – house prices peaked in 1989 and bottomed in 1996, causing prices to fall by 40% – condominiums were considered affordable and single-detached homes accounted for around 36% of a household’s consumption. income, notes the RBC report.
Home prices would have to drop another 40-50%, or hundreds of thousands of dollars more, for homes to become affordable. But if income levels can’t keep pace with house prices and housing supply remains tight, unaffordable housing will persist, Hogue said.
Other factors affect home affordability, including the amount of down payment, said Cherise Burda, executive director of the City Building Institute at Metropolitan University of Toronto.
“The amount of principal you put on a down payment helps offset the cost of borrowing,” she said.
People with an inheritance or family loans to help with the down payment are at an advantage. But a down payment only goes so far. Rising interest rates increase a homeowner’s monthly payment on interest and not the principal amount owed to the lender, thus extending the payment period, she added.
RBC projects that by October 2023, Canadian households could spend 52.5% of their income on homeownership costs, well above what is defined as affordable.
“The pandemic has pushed prices up significantly,” RBC’s Hogue said. “We need to at least see those numbers reversed and back to pre-pandemic levels.”
In January 2020, single-detached homeowners spent 46.9% of their income on ownership costs, and condominium owners spent 34.7%. The average sale price was under $900,000.
Only when house prices and interest rates come down will qualifying income decline. But people still need high six-figure salaries to land property in Toronto, and that’s not going to change any time soon.
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