Canadian mortgage financing costs are surging, proving concerns of diverted disposable income. Equifax data from the CMHC shows the average monthly mortgage payment surged in Q2 2022. Rising interest rates are responsible for most of the climb in the previous quarter. However, growth was only a little faster than low rate-driven price growth a year before. The big difference? Experts see rising rates actually improving affordability in the coming months.
Canada’s Average Monthly Mortgage Payment Is $61 Higher Than Last Year
Canada has seen the average mortgage payment accelerate in growth, but not by much. Monthly commitments rose to $1,458 per month in Q2 2022, an increase of 4.5% (+$61) from last year. The increase is probably not the crushing amount people, and the media, have been hyping up. Especially when contrasted with the rate of growth a year before.
Canadian Average Monthly Mortgage Payment
The average monthly mortgage payment for a Canadian household in Q2 of each respective year.
Source: Equifax; CMHC; Better Dwelling.
Mortgage payments this year might be driven by rates, but low rates also drove costs last year. In Q2 2021, annual growth of the average monthly payment was 4.2% (+$55) per month. Interest rates plummeted to practically nothing, average mortgage payments surged due to prices. This year’s growth is only 0.3 points, or $6 per month, faster than last year. In this inflationary environment, the diverted disposable income may not raise a brow at the aggregate level.
Canadian Average Monthly Mortgage Payment Growth
Annual growth of the average monthly mortgage payment for a Canadian household in Q2 of each respective year.
Source: Equifax; CMHC; Better Dwelling.
Toronto Has Seen Payment Growth Slow Over The Past Year
Toronto real estate is seeing the average mortgage payment actually slow in growth. Monthly payments reached $1,987 in Q2 2022, up 5.4% (+$102) from last year. Last year it grew 5.7% (+$101), even higher than this year’s climb. Both years are unusually high growth and problematic, don’t read that incorrectly. However, higher rates are proving to slow growth compared to discounting them.
Vancouver’s Average Mortgage Payment Increased $97 Per Month
Vancouver real estate has seen a slight acceleration in growth from higher rates. The average monthly payment rose to $2,089 in Q2 2022, up 4.9% (+$97) compared to last year. In Q2 2021, annual growth came in at a slightly slower rate of 4.8% (+$92). Once again, this is a massive and unusually large increase for both years. Rising rates and just-off-record prices led to nearly the same growth as low rates last year.
Rising costs aren’t as important as the speed and velocity that payments rise. Many people will still renew at higher rates if they bought at the record low. This will divert more disposable income from the economy for debt servicing. However, if it happens over time it’s much less of a concern than a sudden jump. The longer it takes to renew, the more principal will be paid down, leaving smaller balances. There’s also tools such as extending the amortization if payments are too much for the homeowner.
Concerns about rising rates diverting disposable income from the economy are valid. However, low-rate driven excess demand was driving prices higher and creating that same issue. Today’s rising rates are primarily a concern because low rates drove prices so high. This is expected to emphasize the rate hike in the near-term.
The difference is this time it’s not expected to be a long-term erosion in affordability. This week National Bank warned of the biggest erosion of affordability in 4 decades. It was primarily attributed to rising financing costs, as well. They don’t expect it to last, as home sales fell back to normal, 2019-levels. The Big Six bank sees prices falling to improve affordability soon.
