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The monthly mortgage cost on an average home has fallen $28 a month since February.
This small savings is a symbolic win for all the young adults priced out of a housing market where average prices are 23.5 per cent higher than two years ago. Think of it as the start of the process of houses getting more affordable in the months ahead.
Since peaking at $816,720 in February, the national average house price has fallen 18.5 per cent to $665,849. Until recently, this price decline has been offset by rising mortgage rates. A discounted five-year fixed mortgage could have been had for close to 3 per cent in the winter, whereas now the cost about 5 per cent.
If you’re priced out of housing and watching for an opening, a rough rule to follow is that rising rates are a bigger factor than modest price declines. The June numbers on housing verify that price declines from the February peak can no longer be classified as modest.
In February, a house bought at the average price with a 10-per-cent down payment, a 25-year amortization and a five-year fixed mortgage rate of 3 per cent cost $3,586 a month. The average-price house in June would cost $3,558 a month, assuming a 4.9-per-cent mortgage. This is where the $28 a month improvement in affordability comes from.
Further affordability gains will be generated by additional interest rate increases.
“We expect that home prices and sales will move even lower amid further pressure from borrowing costs,” TD Economics said after June housing numbers were announced on Friday. In a report headlined BoC takes a Hammer to Housing, BMO Economics says the Bank of Canada’s increase in its trendsetting overnight rate of one percentage point last week “sets us up for an even deeper correction in housing through next year.”
The June housing market numbers don’t even reflect the impact of the Bank of Canada’s latest rate hike. This increase directly affects the cost of variable-rate mortgages, which have been a popular choice with buyers in the past year or so.
Fixed-rate mortgages are also affected, but indirectly. The rise in the overnight rate was bigger than expected and interpreted as a sign that the Bank of Canada needs to up its game to control inflation. Concern about inflation’s staying power could push up rates in the bond market, which have a big influence on fixed mortgage rates.
House prices were on fire last year and in early 2022; rising rates are a fire extinguisher. Not all regional real estate markets are in retreat at midyear, but the trend nationally suggests a decline with more room to fall.
