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Canadian home affordability has steadily improved this year thanks in large part to a decline in mortgage rates and rising incomes, but conditions remain “difficult” in Toronto and Vancouver, National Bank Financial says.

A typical household would need to spend 43 per cent of its pretax income to meet the monthly mortgage payment of a median-priced home, down from nearly 50 per cent in the final quarter of 2018, according to the bank’s affordability index. (The calculation assumes a 25-year amortization period and five-year term, and takes 10 major metropolitan areas into account.)

Over all, home affordability has improved for three consecutive quarters, and is now in line with historical averages, National Bank said. However, further improvements look uncertain – and affordability remains stretched in some major markets.

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“Surging population growth in Canada’s largest metro areas, coupled with leveling mortgage rates, should limit the scope for further improvement in home affordability,” economists Matthieu Arseneau and Kyle Dahms said in the report.

Modest strides in affordability have coincided with a pullback in Canada’s real estate market. After a variety of new regulations aimed at curbing risky borrowing, home-buying activity hit a rough patch, particularly in frothy markets such as Toronto and Vancouver.

In tandem, mortgage rates fell this year – in some cases, by a percentage point from recent highs. Lower rates have been the biggest contributor to improving affordability, National Bank said. “Indeed, the free-fall in financing costs over the last nine months was the most substantial since 2012."

That said, the mortgage qualifying rate has hardly budged, said Robert McLister, founder of mortgage comparison site RateSpy.com. The mortgage qualifying rate – which is the most common five-year fixed posted rate at Canada’s Big Six banks – is used in stress tests. Home buyers must prove they can afford mortgage payments with a 5.19-per-cent interest rate, despite some discount rates being half that much.

“What we’re seeing now is the Big Six banks hold mortgage qualifying rates high mainly out of their own self-interest,” Mr. McLister said. “If you saw that stress test rate go from 5.19 per cent down to where it should be based on the current levels of bond yields, then you’d see a significant impact on home sales and demand.”

Even with affordability improvements, “the situation remains difficult” in the Toronto and Vancouver areas, Mr. Arseneau and Mr. Dahms noted.

In Toronto, a typical monthly mortgage payment ($3,805) would eat up 56 per cent of median household income. In Vancouver, the mortgage payment ($4,491) is equal to 69 per cent of typical household income. Both markets have improved from last year, although affordability remains worse than the long-term average.

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Down payments are a particular hurdle. If the typical Toronto household saved 10 per cent of its pretax income, it would take 89 months to save up for the minimum down payment for today’s median home price, according to National Bank’s calculations. (The median price accounts for all home types, such as detached houses and condos.) In Vancouver, it would take 311 months. That’s because, with the median home price just over $1-million, a minimum 20-per-cent down payment is needed. Timelines are even lengthier for detached homes.

At the same time, both markets are gaining momentum, with sales bouncing from depressed levels. In Greater Toronto, the average sale price in October jumped 5.5 per cent from a year earlier to slightly more than $850,000. Although benchmark prices are well below record highs in Metro Vancouver, they remain the steepest in Canada.

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