Why are mortgages so expensive in Canada?

This is according to the latest home affordability report compiled by Ratehub (which owns Ratehub.ca as well as MoneySense.ca), a study that assesses real estate data from the Canadian Real Estate Association (CREA), as well as mortgage and stress test rates, to determine how affordability is evolving on a month-over-month basis.

The findings rank cities based on the income required to purchase the average-priced home there, and it found 12 of 13 of Canada’s major markets improved for affordability conditions. This was largely due to a drop in the average five-year fixed mortgage rate in August, which lowered to 5.16% from 5.29% in July. By extension, the average mortgage stress test, which adds 2% onto a borrowers’ contract mortgage rate, fell to 7.16%.

The August numbers capture the first two rate cuts made by the Bank of Canada (BoC); the central bank decreased its benchmark cost of borrowing by a quarter of a percentage point each in June and July of this year. That brought the benchmark cost of borrowing down to 4.5% from the previous 5%, and pulled lenders’ prime rates and variable mortgage rates down with it. The BoC’s third rate cut, implemented in September, is not included in the August data. (See July’s mortgage affordability in Canada report.)

Here’s how that’s impacting affordability in housing markets across Canada.

Housing affordability across Canada’s major cities

Check out the chart below to see how affordability changed between July and August in Canada’s main housing markets, based on the income required to qualify for a mortgage. The stress test rates used are 7.29% for July and 7.16% for August. Mortgage rates used are 5.29% in July and 5.16% in August.

August 2024: How much do you need to earn to buy a home in Canada?

Canadian cities where affordability improved

Where in Canada is owning a home becoming more affordable?

Toronto: Sales still in the doldrums

It’s been a sluggish summer for Toronto-area real estate, and August was no exception. Home sales dipped by 5.3% annually, led by a steeper decrease in the condo market, as unit transactions plunged by 11.4%. That, combined with an abundance of new housing supply, led to softening home prices. The average Greater Toronto Area (GTA) home came to $1,082,200 in August, a month-over-month decline of $15,100. As a result, a home buyer in the city needed to earn $204,100 to qualify for the average mortgage—down $4,850 from the previous month. 

Victoria: On summer break

The Victoria housing market had a “rather relaxed” final month of summer, according to 2024 Victoria Real Estate Board (VREB) chair Laurie Lidstone. Home sales dropped by 16.5% from July, putting downward pressure on prices, with the average lowering by $5,900 to $866,700. Victoria-area buyers now need to bring in $166,420 annually to qualify for the average-sized mortgage, down $2,780 from last month.

Vancouver: Well below seasonal

Vancouver, the most expensive housing market in Canada, has seen home prices slip over the summer months, as sales remain subdued compared to last year. According to Greater Vancouver Realtors, transactions were down 17.1% compared to last year, roughly 10% below its seasonal average. The average home price in the region has decreased by $1,800 since July, to $1,195,900. That’s given borrowers slightly more breathing room, requiring them to earn $2,680 less compared to last month, at $224,000.

Canadian cities where affordability worsened

While dropping mortgage rates eased buying conditions across the majority of the country, there was one hold out. Here’s where affordability worsened or improved the least.

St John’s: A second consecutive month at the bottom

The east coast has been an outlier in terms of activity this summer, as sales have stayed brisk. This is largely due to better affordability overall; with average prices below the $500,000-mark, buyers in these regions are less impacted than the rest of Canada by higher borrowing costs and the stress test. Home prices rose $4,900 month over month to an average of $354,600. That means a home buyer there must earn $160 more, at $76,880, to qualify for the average mortgage. This is the only market out of the 13 where the income requirement increased.

Regina: Slower, but still above seasonal

The Saskatchewan housing market has remained robust, even as higher borrowing costs have slowed activity in other major markets. “Unlike many other parts of the country, sales in our province continue to outperform historical averages for a fourteenth consecutive month,” stated Saskatchewan Realtors Association CEO, Chris Guérette. “Saskatchewan’s relative affordability, when paired with employment gains and falling unemployment rates, continues to support strong housing demand in our province.” That’s pushed home prices up slightly in Regina, with the average rising $1,300 month over month to $319,700. That was still offset by lower mortgage rates, however, with the average income lowering by $400 to $70,780.

Montreal: A steady increase in sales

Recent rate cuts have also been effective in fuelling growth in the Montreal market, keeping a firm floor under home prices. The Quebec Professional Association of Real Estate Brokers (APICQ) reports that sales rose 9% annually in August. The board also points out that while Montreal income is similar to other major Canadian cities, buyers have more “maneuvering room” to purchase real estate due to lower overall home prices. This boost in activity pushed that average sale price up $2,600 from July, to $533,100. However, lower mortgage rates meant buyers needed to earn $620 less than last month, at $108,550.

How much mortgage can you afford? How much house can you buy?

The above data reflects how mortgage borrowing conditions can change on a monthly basis, as well as the income required to purchase a home. If you’re currently on a house hunt and shopping for a mortgage, you can calculate your own affordability with the MoneySense mortgage affordability calculator, which personalizes outputs based on income, existing bills and debt obligations, as well as overall debt ratios.

Will housing affordability continue to improve for Canadians?

There’s one thing analysts can agree on, and it’s that more interest rate cuts are coming. While the above study captures just the first two decreases from the BoC, another was implemented on September 4, bringing the benchmark cost of borrowing down by a cumulative 75 basis points. At least two more cuts are largely expected from the BoC this year, and perhaps as many as six in 2025. As well, the U.S. Federal Reserve (the American central bank) is now in on the cutting action, delivering a whopping 50-basis-point decrease in their most recent rate announcement on September 18. Another half-point in cuts is expected this year, followed by another 1.5% by the end of 2026.

Should the most bullish of expectations materialize, Canadians could see the benchmark borrowing rate fall to as low as 2.75% in 2025. That in turn will pull down variable mortgage rates, and influence bond markets, which impact fixed mortgage rate pricing (the lowest five-year mortgage rate in Canada is currently 3.99%, see table below). Brand-new mortgage policies introduced this month, which ease down payment and amortization restrictions for first-time home buyers, should also help move the dial on affordability. Although rising home prices could outweigh the benefits, once the market shakes off its sleepy summer conditions.

Check this table to compare mortgage rates in Canada right now.

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Read more about mortgages:

• How much income do I need to qualify for a mortgage in Canada?
• Where to buy real estate in Canada
• The complete guide for first-time home buyers in Canada
• Tools to calculate your mortgage payments and costs in Canada
• Mortgage refinance calculator
• Mortgage renewal calculator

About Penelope Graham

As director of content at Ratehub.ca, Penelope has over a decade of experience covering real estate, mortgage and personal finance. Her commentary is featured on BNN Bloomberg, CBC and The Globe and Mail.

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