Carrying costs paint bleak picture
Analysis shows housing market in 2022 actually more affordable than now
Homebuyers beware: house prices may have cooled and interest rates stabilized but owning a home is more unaffordable than ever.
The Toronto area’s home prices have fallen by around 17 per cent since the pandemic peak two years ago, but mortgage costs are staggeringly more expensive now thanks to high interest rates — in fact, carrying a home is around 30 per cent more expensive for variable rate holders.
A Star analysis of carrying costs over the last four years found the scorching housing market of 2022 was actually more affordable than today’s lower-priced environment. And as the market picks up, even when the Bank of Canada cuts rates home affordability will likely get worse as home prices are on the rise, pushing carrying costs higher. Already, one month into 2024, an increase in home values has wiped out any affordability gains from a marginal rate drop, eroding affordability further.
During the February 2022 price peak, the average Toronto home cost $1.33 million with the best fiveyear fixed rate being 2.89 per cent and the best five-year variable being 1.45 per cent, resulting in monthly mortgage payments of $4,992 and $4,243 respectively, according to a Ratehub calculation — assuming there’s a 20 per cent down payment and 25-year amortization.
Fast forward to February 2024, and home prices have fallen to $1.1 million but rates have increased to 5.29 per cent for five-year fixed and 6.75 per cent for five-year variable, resulting in $5,306 and $6,076 monthly mortgage payments, respectively. That’s a $314-per-month increase for fixed-rate mortgages and a $1,833 jump for variable rate mortgages in two years.
“People are getting squeezed,” said James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender. “While prices have fallen off the peak they’ve still increased year-over-year and rates are still right at their peak.”
First-time homebuyers are the most vulnerable segment of the buyer pool in the current environment, he said, as qualifying for a mortgage is significantly harder than two years ago.
Rapidly accelerating home prices can be devastating for homebuyers, as a market comparison of 2019 and 2022 shows. In the pre-pandemic market of 2019, home prices averaged $780,000 with interest rates in the three per cent range for fixed and variable-rate mortgages. By 2022, home prices had almost doubled and despite ultralow rates, mortgage costs increased by almost $1,900 for fixed-rate holders and almost $1,300 for variable rate.
Already in 2024, from January to February most real estate markets in Canada became less affordable due to home values increasing slightly while interest rates came down marginally, Laird said. In Toronto, households needed an additional income of almost $4,000 from January to February to afford a home.
“The two key variables, which are home values and interest rates, have moved in opposite directions since January; interest rates are down and home values are up in 12 out of 13 cities,” he said. “The increase in home values was enough such that affordability decreased in 11 of 13 cities despite the rate drop.”
To help with eroding affordability, either the Bank of Canada has to drop the overnight lending rate by 150 basis points, or home prices need to dive by at least 20 per cent
to be in a better range of affordability, said David Rosenberg, founder and president of Rosenberg Research and Associates, an economic research firm.
There needs to be some combination of interest rate drops and price depreciation to occur, he said, but “I’m leaning more toward the rate side now that inflation has been licked and the economy is flat.” In February, inflation fell to 2.8 per cent, indicating that the bank’s first rate cut could arrive this summer.
“We need fixed rates in the low four per cent range to help homeowners out,” said mortgage broker Ron Butler. “Just one per cent can have a big effect.”
If rates remain elevated for longer, far more people will sell their homes, he said, as their carrying costs will be unaffordable.
“The number of people selling their houses now is an incredibly small percentage,” Butler added. “But if things don’t change we will see a literal bump in the numbers there.”