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Borrowers experienced a slight reduction in homeownership costs in the first quarter, despite affordability remaining near its worst level ever.

Small declines in fixed mortgage rates and homes prices earlier in the year helped reduce the average cost of all housing types to 60.9% of median income in Q1, down from 63.8% in the previous quarter, according to a report from RBC.

“Still, affordability remains close to its worst point ever nationwide,” noted report author Robert Hogue.

He said the sharp home price and interest rate gains experienced during the pandemic “continue to seriously constrain” homebuyers. “The slight relief last quarter reversed just a fraction of the massive deterioration in affordability. There’s a long way to go, but affordability is heading in the right direction.”

Steep market-entry hurdle for first-time borrowers

While the slight improvement in affordability offers a glimmer of hope for borrowers, first-time buyers are still grappling with significant obstacles as they attempt to enter the market.

“Becoming a homeowner has gotten much more difficult since the pandemic,” Hogue explained. “Not only has the crushing weight of mortgage payments been a major hurdle, but the price of admission into the housing market—the downpayment—shot up significantly.”

Since 2019, the minimum down payment for a typical starter home in Canada—a condo apartment—has skyrocketed by 40%. Hogue says the smallest down payment required for an average condo valued at $574,500 is now $32,500, based on 5% on the first $500,000 and 10% on the remaining amount.

“This represents a hefty 38% of the annual pre-tax income for a typical (median) household, or six percentage points more than before the pandemic and 12 percentage points more than a decade ago,” he added.

Affordability expected to improve, but not by much

While the small improvement seen in the first quarter reversed “just a fraction of the massive deterioration in affordability” seen in the past several years, Hogue said borrowers are likely to see continued improvement in the quarters ahead.

For example, the Bank of Canada’s quarter-point rate cut in June, which provided slight relief to variable-rate borrowers, was just the start of more rate cuts to come. RBC expects the central bank will deliver two full percentage points worth of easing by the end of 2025, bringing its key lending rate back to 3%.

At the same time, RBC says continued gains in houshold income will also help to reduce financial pressures being faced by homeowners.

“It will take time—and several interest rate cuts—for the weight of ownership costs to lighten sufficiently enough to spur many potential buyers into action,” Hogue predicts.

But even under RBC’s scenario of a drop in interest rates and moderate increases in home prices, affordability will only return to early 2022 levels, Hogue says, when the measure had just surpassed its previous all-time worst level set in 1990.

“In other words, back to a time of deeply unaffordable conditions,” he acknowledged.

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