Rising interest rates eat into homebuyers' purchasing power

Article content

Higher borrowing costs are squeezing Canadians’ ability to afford a home, including in Alberta, a new report shows.

“The impact of increased mortgage rates and increased values for homes in our region has been especially hard on first-time homebuyers,” says Tim Jones, associate broker and realtor at Re/Max Complete Realty in Calgary.

Article content

The new report by online mortgage broker firm Nesto suggests this much, finding that Albertans — Calgarians included — needed more than $11,000 in additional annual income this past August compared with the same month last year to qualify for a fixed, five-year mortgage to purchase the average priced home.

Article content

All told, Albertans need an annual income of about $103,000 to qualify for a mortgage at 5.34 per cent to purchase the average priced home of $485,000 (with a 20 per cent down payment).

The higher income is a factor of the federal stress test.

The Office of the Superintendent of Financial Institutions (OSFI) rule stipulates buyers must qualify at the higher of either the benchmark rate (5.25 per cent) or the offered rate plus two percentage points. In today’s environment, where offered rates are now higher than 5.25 per cent, buyers need to qualify at the former, which in the case of the study was 7.34 per cent (two percentage points higher than 5.34 per cent).

In Calgary, where the median price of a home is about $505,000, according to Calgary Real Estate Board (CREB) data, buyers need an annual income of about $120,000 to qualify.

Principal broker at Nesto Chase Belair says average five-year fixed rates are even higher today ranging from 5.5 per cent to 6.5 per cent, a level not seen since last November, which at the time helped drive prices nationally to a recent low in January.

Article content

“Then rates started to come down in February and March, and many Canadians believed the Bank of Canada was done hiking rates,” he further explains.

“So, home prices started to come back up with higher demand.”

With higher borrowing costs this fall, however, Belair expects prices to stabilize or even decline.

But two factors could continue to drive prices higher: high immigration and low inventories.

Calgary has experienced both drivers amid recent record sales. It has seen high migration including from other provinces — with its population expected to grow by 40,000 this year — and low inventory for homes, says Justin Warthe, realtor with Re/Max House of Real Estate in Calgary.

“A balanced market in Calgary would have an inventory of about 5,500 homes,” he says.

The most recent CREB data shows inventory at about 3,400.

Warthe predicts inventory will grow as borrowing costs will move slightly higher before plateauing at possibly six per cent, resulting in less activity, over the next several months.

Ongoing conditions will be challenging for first-time buyers, but move-up buyers should be in better positions to buy, Jones adds.

“The base price of a starter home has gone up significantly in the past year, which has given move-up buyers great equity to leverage,” he adds.

“It is a good time to do a move-up — if a person can afford to do so.”

Share this article in your social network