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A home is for sale in Halifax on July 22, 2021.The Globe and Mail

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.

Rising rates will soak up a lot of the benefit of falling prices. But there’s a sense of momentum in falling prices now. For a change, prices in June were down on a year-over-year basis as well as from the February peak.

A risk if you get into the real estate market in the next 12 months is that the price of your home goes down. There’s no material impact on your life if this happens, but you’ll probably feel bad about it until the inevitable house price rebound happens.

While you wait, you can enjoy the equally inevitable decline in mortgage rates from whatever level they peak at in the months ahead. Here’s where a variable-rate mortgage makes some sense. You’ll be directly exposed to any rate hikes ahead, but you’ll likewise benefit in real time from the rate declines that come later.

If a fixed-rate mortgage is more your style, the potential for lower rates in the medium term suggests you consider a lesser term than five years. A two-year term might save you 0.2 to 0.4 of a percentage point compared with a five-year term and bring you to renewal at a time when the war on inflation will likely be ending.

There’s a view in housing that building more houses and condos is the answer to today’s affordability problem. Let’s hope that residential real estate construction ramps up to a point where we get to test that theory. Meantime, falling prices are the best hope for young adults priced out of housing.

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