Canadian homebuyers are finding little relief as falling home prices are largely canceled out by soaring mortgage rates. The Bank of Canada's aggressive interest rate hikes to combat inflation have pushed borrowing costs to levels not seen in over a decade, leaving monthly payments near record highs even as property values decline.
The central bank raised its key lending rate from 0.25% to 4.5% between March 2022 and January 2023. This has driven up both variable and fixed mortgage rates. According to data from rate comparison sites, the average five-year fixed mortgage rate now exceeds 5%, while variable rates are above 6%. Meanwhile, home prices have dropped roughly 10% from their pandemic peak, according to the Canadian Real Estate Association.
The trade-off is stark: a buyer purchasing a $600,000 home with a 20% down payment and a five-year fixed rate at 5.5% would pay about $2,700 per month, slightly more than the $2,650 monthly payment on a $660,000 home with a 3% rate last year. The price decline has not improved affordability.
First-time buyers are particularly squeezed, as they lack equity from a previous sale to cushion the higher costs. Existing homeowners renewing mortgages face payment shocks. Renters hoping to enter the market are deferring plans. The stress is evident in housing data: sales volumes dropped sharply through 2022 and early 2023.
What comes next depends on inflation. If the Bank of Canada holds rates steady or cuts later in 2023, mortgage costs could ease modestly. But if inflation proves sticky, further hikes remain possible. For now, the market remains in a holding pattern, with affordability at a multi-year low.