The dream of owning a home in one of Canada’s major cities might be getting a bit more attainable, as the average income required to purchase a home continues to decrease. This change is primarily due to falling mortgage rates and slightly easing home prices across the country, providing some relief to potential buyers.
In fact, new data from Ratehub.ca shows that the income required to buy a home in Canada has dropped once again, as of October 2024. This decrease signals a shift towards improved affordability, although buying a home in some of Canada's largest cities still remains a significant financial challenge.
Mortgage Rate Cuts Boost Affordability
The decrease in income requirements comes as mortgage rates have steadily decreased, with the Bank of Canada reducing its key lending rate on October 23, 2024, from 4.25% to 3.75%. This adjustment made qualifying for a mortgage a little easier, as the associated stress test for buyers became less difficult to pass. The stress test uses a mortgage rate that is 2% higher than what the buyer is getting from a lender (or 5.25%, whichever is higher) to determine if they can manage rising payments should rates increase in the future.
Lower mortgage rates make it easier for buyers to pass the test, which is based on factors such as the home’s price, annual salary, and other monthly debts. The Financial Consumer Agency of Canada's Mortgage Qualifier Tool helps estimate monthly payments, factoring in things like property value, down payments, and other debts. Buyers can use this tool to see if they qualify based on recommended debt ratios—32% for gross debt service and 40% for total debt service.
A Closer Look at Key Canadian Cities
When it comes to major urban centres, the income needed to buy a home has dropped in several cities, with Vancouver, Toronto, and Hamilton seeing the most significant decreases. These cities are benefiting from relatively stable home prices and better availability of inventory, which helps prevent price increases that could outpace mortgage rate cuts.
For instance, in Vancouver, the required salary for homebuyers decreased by the largest amount for the second consecutive month, following a similar trend in Toronto. Both cities also experienced an uptick in sales activity in October, which boosted the market without causing home prices to climb.
On the other hand, Fredericton saw a surprising rise in income requirements. Despite an overall trend of easing home prices in Canada, Fredericton experienced a jump in its average home price by $16,100 from September to October, causing the required income to go up by almost $2,000.
Victoria and Fredericton were the outliers in this trend, where prices continued to climb instead of stabilizing or decreasing.
How Much Do You Need to Earn?
So, how much do you actually need to make to buy a home in Canada's biggest cities? Let’s break it down:
Vancouver: As one of the priciest markets in Canada, homebuyers in Vancouver need to earn a significant income to afford an average home. However, recent price drops and mortgage rate cuts have provided some breathing room for potential buyers.
Toronto: Similarly, the required salary to buy a home in Toronto remains high, but a decrease in home prices and interest rates has eased the financial burden for many buyers.
Hamilton: This Ontario city has also seen a drop in the required income, with easing prices and mortgage rate cuts improving affordability for buyers.
Fredericton: The only city where the income requirement has risen, Fredericton's sharp rise in home prices has made it more difficult to qualify for a mortgage, even as prices drop in other areas.
The Bottom Line
While affordability is improving in several Canadian cities due to lower mortgage rates, buying a home is still a challenge for many Canadians. However, the combination of lower mortgage rates and stabilizing prices in several key markets means that potential buyers have a better chance of affording their first home. As the Bank of Canada continues to adjust interest rates, it’s clear that these shifts could continue to provide relief to those trying to navigate the ever-changing real estate market.
For those looking to buy, it’s a good time to evaluate your financial situation, use mortgage tools to gauge your affordability, and keep an eye on the housing market trends in your desired city.
