A “trifecta” of conditions in Canada’s housing market last quarter translated into the biggest improvement in affordability since 2019, National Bank of Canada said Thursday.
The institution’s Housing Affordability Monitor showed “widespread” improvement in each of the 10 largest markets it tracks. National Bank gauges housing affordability by tracking the mortgage payment as a percentage of income for the median home price.
This statistic fell 3.1 percentage points to 58.9 per cent in the first quarter of 2024, marking the largest quarter-to-quarter improvement since Q2 of 2019.
That came after the bank’s affordability monitor stood at its worst levels since the 1980s to the end of 2023.
National Bank said the “greatest” improvement was seen in Canada’s three least affordable housing markets of Toronto, Vancouver and Victoria, thanks to relatively steeper drops in home prices in the quarter.
Mortgage payments as a percentage of income dropped 5.7 percentage points to 84.4 per cent for non-condo properties in Toronto last quarter and declined 2.7 percentage points to 50.2 per cent for condos. Vancouver had even steeper drops of 8.9 points and 3.8 points for non-condo and condo properties, respectively.
Pritesh Parekh, Toronto-based Realtor with Century 21, tells Global News that there hasn’t been the run-up in prices locally that many market watchers typically expect ahead of the spring housing season. As a result, he says some buyers who were gearing up for a purchase in the first quarter of the year may have been able to get the home they were looking for at the right price.
“It worked out for a few people who were ready to pull the trigger,” he says.
The boost in housing affordability was driven by a “trifecta” of conditions as home prices softened, median incomes rose and mortgage rates fell, National Bank economists Kyle Dahms and Alexandra Ducharme said in the report.
Will housing affordability continue to improve?
While the Bank of Canada has maintained its policy rate at 5.0 per cent in each of its meetings so far this year, the authors note market expectations for rate cuts helped to push down the benchmark five-year mortgage rate by 32 basis points in the first quarter.
But Dahms and Ducharme said that despite the notable improvement in the first quarter, the mortgage cost as a proportion of income is “hardly an accessible level” where it stands. In Vancouver, the proportion of median income needed to cover payments on the median non-condo property remains more than 100 per cent.
And the report shows little optimism for the rest of the year.
While expectations for falling interest rates later in 2024 should result in “somewhat cheaper financing costs” for new homebuyers in the second half of the year, robust population growth is expected to keep home prices “resilient.”
Canada’s supply gaps will continue to put upward pressure on prices, the report notes, with the ratio of the working-age population to housing starts at its worst levels in more than 40 years.
“As a result, price dynamics for both purchases and rents should remain skewed to the upside in the current acute housing shortage,” the authors wrote.
Money markets and economists are expecting an initial interest rate cut from the Bank of Canada sometime in the months ahead, with the next rate decision set for June 5.
Parekh says he expects that the first long-anticipated rate cut from the central bank will bring more buyers into the market, but he doesn’t think it will meaningfully change the affordability picture for most.
Rate cuts will affect would-be buyers who are “right on the cusp” of being able to afford a home today, he says.
But a single drop of a quarter-percentage point in the Bank of Canada’s policy rate likely won’t be enough to make a significant difference in monthly mortgage payments, he notes. A first rate cut might act more as a “psychological trigger” than a “financial trigger,” he notes.
“If it is something like 25 basis points, it’s not large enough to change the conversation on affordability,” Parekh says.
“I think it would probably take a little bit more on the downside to help.”