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Falling home prices are typically welcomed by prospective homebuyers, since it means an improvement in affordability.

For today’s first-time buyers, however, that’s not necessarily the case.

Since the Bank of Canada started hiking interest rates back in March—and at every rate meeting since then—affordability has actually taken a hit.

Data from Equifax Canada shows that, while the average loan amount for first-time homebuyers dropped by 0.5% in the second quarter, their average monthly payments had actually increased by 10%.

"The cooling housing market in Canada should not be mistaken for increasing affordability,” said Rebecca Oakes, Vice-President of Advanced Analytics at Equifax Canada. "Affordability depends not just on home prices, but also on monthly payment obligations for a mortgage. Higher interest rates coupled with high inflation can really stretch a consumer’s monthly expenditure, while many could find it difficult to qualify for a mortgage.” 

In fact, affordability deteriorated in most major markets in Canada as of the second quarter, according to RBC Economics.

Its Housing Trends and Affordability report, which measures affordability based on ownership costs as a percentage of household income, rose to a 30-year high. The largest decline in affordability was seen in Vancouver, followed by Toronto, Ottawa and Montreal.

It should be noted that house prices have continued to trend lower since the second quarter. According to the Canadian Real Estate Association, the average home price was $637,673 as of August. That was up slightly from July, but down 4% from a year earlier.

At the same time, interest rates have continued to rise, with the Bank of Canada’s benchmark lending rate reaching 3.25% in September, up 300 basis points from its record-low of 0.25% just seven months earlier.

A slowdown in mortgage activity, led by first-time homebuyers

The rise in interest rates has led to a slowdown in mortgage activity, which was down overall by 16.4% and over 25% among first-time buyers, according to the Equifax report.

"High home prices have been impacting the affordability of all consumers, but in particular first-time homebuyers,” the report noted.

Over the past two years, the distribution of average new mortgage debt has gradually risen in size. As of Q2 2019, over half of new mortgage loans were less than $200,000. By 2022, that percentage fell to 38%. Mortgages between $400,000 and $600,000, meanwhile, accounted for 17% of new loans in 2022, up from 11% in 2019.

The average loan amount for new mortgages in Canada was $367,500 as of the second quarter, with average loans for first-time homebuyers at $430,700. In Toronto and Vancouver, the average loan amount for first-time homebuyers was over $600,00, despite some early price corrections in those markets as of Q2.