the party real estate is well and truly finished. The Bank of Canada’s interest rate hikes put a damper on transactions and pushed prices down.
If the situation is worrying for sellers, it is historically difficult for new buyers. Never have they had to devote such a large share of their income to becoming homeowners since comparable data became available (2006), according to a new study by the firm AppEco1.
According to the analysis, the average household must now make mortgage payments of $2,557 per month if they want to acquire the typical Montreal-area property, worth $519,500 in September.
The difference is $1,124 compared to the monthly payment that new buyers had to pay in 2019, i.e. before the pandemic2. A… yoye!
In other words, the recent drop in house and condo prices has not yet offset the effect of higher interest rates on monthly bills.
The mortgage burden of new buyers has increased across Canada, but more so in the Montreal area, in particular because prices have risen faster here than elsewhere for the past three years.
In fact, the price increase has been 48% in the Montreal area since 2019, as much as in Toronto, but more than in Vancouver (33%).
To make its analysis, AppEco combined the various elements that influence buyers’ decisions, namely property prices, interest rates and household disposable income (after taxes and government transfers). In the Montreal region, the disposable income of the average household was $87,580 in the 3e quarter of 2022.
Six major metropolitan areas in Canada were dissected with their own data, allowing AppEco to estimate the mortgage burden of their buyers.
For 15 years, therefore, and until 2021, this mortgage burden linked to the purchase of a typical property had fluctuated between 20 and 25% of the average household income in the Montreal region. However, in 2022, it rose sharply, reaching 34% on the 3e quarter of 2022, a peak.
The comparison of this mortgage burden between the regions illustrates their great differences. In the region of Quebec, the burden has certainly increased, but in September, households in Quebec could get their hands on the average property of $323,500 by devoting only 21% of their disposable income to it, compared to 34% in Montreal.
In Toronto and Vancouver, the typical property is so expensive that the average household cannot own it, even with sacrifices, since the mortgage burden would then represent 57% of its disposable income, much more than the banks will tolerate. .
“It has never been so difficult to become an owner today,” explains economist Julien McDonald-Guimond, lead author of the analysis.
At least, he points out, the majority of existing homeowner households are not feeling the impact of interest rate hikes, by having fixed mortgage terms. They will, however, be hit on renewals, unless rates come down by then.
What will happen over the next few months? No doubt the market will remain slow and prices will be under pressure, according to AppEco’s analysis.
“With the recession scenario, we add job losses and lower incomes to rising mortgage rates. We can therefore expect further price reductions,” McDonald-Guimond believes.
Properties will not all suffer the same declines. The best located will be less affected, such as those that do not clash with their environment (in terms of value, for example).
Another element: ordinary homeowners have often owned their house for some time, and can therefore hope for a significant gain on resale, despite the recent decline in prices.
However, these prices have fallen significantly since the spring peak, a rare phenomenon in Quebec. The last decline was in the early 1990s, 30 years ago, and it took a few years before a return to normal.
For those who doubt it, the Canadian Real Estate Association (CREA) database that serves as comparisons is very reliable. Based on thousands of transactions, ACI compares bungalows, cottages and condos with comparable attributes (number of bedrooms, bathrooms, etc.) and corrects for seasonal effects. The prices in this column are for the typical ACI property, a combination of houses and condos.
The price peak was reached a little later in Quebec than in British Columbia or Ontario. The highest average price was noted in May 2022 in the Montreal and Quebec regions, three months later than in Toronto and two months later than in Vancouver or Ottawa.
The expensive cities of Vancouver and Toronto, where properties still sell for more than $1.1 million, twice as much as Montreal, are not in their first recent decline. In 2017 and 2018, prices had been significantly deflated, before regaining momentum during the pandemic.
Another note: despite the rate hikes, some markets continue to rise, such as Calgary and St. John’s, Newfoundland, two cities in the oil provinces where prices have not retreated.
To see the Bank of Canada’s determination to smash inflation, we will have to be patient before seeing house prices climb again, especially considering the evolution of mortgage burdens calculated by AppEco.
1. Available data allows AppEco to trace the historical comparison back to 2006, but some other comparisons with earlier dates do not reach the current peak.
2. Assuming 10% down payment and fixed rate for 5 years. With a variable rate, the monthly payment is lower ($2,447), but the difference with 2019 is similar, at $997.