After three years of a hot housing market, full of bidding wars and homes selling for over the asking price, Canada’s housing market is finally cooling off.
According to a Royal Bank of Canada report, buying a home in Canada is the easiest it has been in the last three years. However, experts say the dream may still be unattainable for many.
“The positive shift in the last five quarters has helped homebuyers’ prospects across all regions and housing market segments. However, it’s been condo buyers that have seen the most significant turnaround,” the report said.
The report predicts stable home prices over the next two years.
“We expect generally stable prices in Canada over the next two years—with some local exceptions—and modest wages growth amid persistent labour market slack,” RBC economist Robert Hogue said in the report.
The RBC report said the improving home affordability is driven by two factors: it has become cheaper to get a home loan and home prices in Canada have been falling.
“Mortgage rates have come down quite a bit in the past three years. That’s number one (on the list of reasons),” said Victor Tran, mortgage expert at Rates.ca.
Before someone borrows money from a federally regulated lender, like a bank, they need to prove they can afford payments at a qualifying interest rate. Typically, this rate is higher than the actual rate in a mortgage contract.
This is referred to as the “stress test.”
The stress test requires borrowers to qualify for a mortgage at a rate of 5.25 per cent or two per cent above the contract rate, whichever is higher. Borrowers need to prove they could handle higher monthly payments if the central bank rate rose rapidly.
“Lower mortgage rates equal lower qualifying rates, or in other words, lower stress test rates. Borrowing power improves a little bit,” Tran said.
Home prices still too high
In May, the average home price in Canada fell 3.5 per cent compared with this time last year. But in many markets, housing affordability remains worse than it was before the pandemic.
“Those two factors (interest rates and home prices) are making it technically more affordable, but it’s not like homes have been cut in half in price or anything. It’s still very expensive,” said Tom Storey, sales representative at Royal LePage.
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“If it was 40 degrees out for five days in a row and the next day it’s 35 degrees, it’s technically cooler, but I’m still probably sweating. And I think that’s probably what buyers are feeling in this type of market.”
The post-pandemic market highs in Canada pushed housing out of reach for many Canadians. In 2021, home prices skyrocketed 10.3 per cent nationally compared with 2020. They peaked in 2022, jumping 7.7 per cent compared with 2021.
For anyone buying a house in those two years, bidding wars would have been the norm, and many would have had to buy the house without being able to put any conditions in.
Storey said that while buyers are realizing they hold more cards than they did three years ago, there is a mismatch between what buyers want to pay and what sellers are expecting for their properties.
“The number of listings that are coming to the market, month over month, it is a bit higher than what we’ve seen in previous years. But the reason why there’s so many (houses on the market) right now is because the absorption is not there. Buyers and sellers are not agreeing on prices,” he said.
One of the biggest factors keeping buyers on the sidelines is U.S. President Donald Trump’s tariffs, Tran said, particularly in markets with exposure to the U.S. economy.
“Windsor and Hamilton (in Ontario) are very exposed because most of the town is tied to manufacturing or the steel industry. Those markets are facing more uncertainty than other markets,” he said.
Tran said potential buyers should also factor in any costs that come with owning and living in a house of their own.
“Other things are expensive as well, too, and that’s scary for a lot of people entering the housing market. For example, property taxes, utilities and insurance. Those costs that everyone has to deal with are expected to go up on a year-over-year basis. That’s something we should always expect and budget for,” he said.
For anyone looking to buy a condo, affordability measures look very good, with affordability back to pre-pandemic levels in some markets.
“In some parts of the country—including Edmonton, Saskatoon, Regina, Winnipeg and even Toronto—the condo affordability measure is now effectively back to where it was before the pandemic,” the report said.
Storey said that while condo inventory is rising rapidly in some of Canada’s priciest markets, including Toronto and Vancouver, other types of homes remain few and far between.
Buyers should not be surprised to find themselves in a bidding war for a semi-detached home in a hot market, he said.
“There just isn’t a ton of inventory for that property type. So even in a soft overall market, a semi-detached home still could get several offers or sell over the asking price,” he said.
Tran said lower interest rates also mean that banks and other lenders are competing to retain customers whose mortgages are coming up for renewal.
“Not only are they offering low rates to save a customer or even acquire a new customer, but a lot them have additional promotion where they would throw cash at customers. Like cash back mortgages,” he said.
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