On Wednesday, September 4th, the Bank of Canada made its sixth (out of eight for the year) interest rate announcements and for the third time this year, they lowered the overnight rate by 25 basis points. Banks lowered their prime rate as a result, and it now sits at 6.45%.

As a quick reminder, the prime interest rate is the reference rate used by financial institutions to determine the variable interest rate they will offer for loans to businesses and individuals. It is the initial cost of borrowing money and while it can go higher (if the lender thinks you’re a risky loan) or lower (if the lender thinks you’re a safer loan), prime is where it all starts.

In the real estate world, the prime rate is critical as any homeowners who have a variable rate mortgage are directly impacted by a change in prime rate. Such mortgages are typically structured around an interest rate base on prime plus (or minus) a certain number. As a result, when prime goes up or down, the effective interest rate that variable rate mortgage holders pay goes up or down.

The 25 basis points (or a quarter percentage in layman’s terms) drop on September 4th was the third in a row and means that variable rate mortgages are now at a three quarters of a percent lower interest rate than earlier in the year. Given the high cost of real estate in Toronto and the GTA – and correspondingly high mortgage amounts – that is a welcome change for homeowners with this type of mortgage.

That being said, we’ve previously written about the relatively minor impact of a 25 basis point drop, which basically makes every $100,000 of mortgage about $14 cheaper per month to finance.

While that isn’t a lot of difference, we’ve now had three of these twenty-five basis points drop to prime, so it is starting to add up. Speaking of adding up, we thought perhaps it was time to do some simple math on what a variable rate mortgage costs at this new interest rate.

We were curious how much of an impact these drops have had on affordability and decide to look back to the last time interest rates were at (or very close) to this level. Our idea was to compare the cost for a typical 80% ratio mortgage, using the average price in Toronto and the other parts of the GTA, to see how much it would have cost on a monthly basis to own a home at the current variable interest rate.

Let’s get to it!

### It feels just like Christmas.

Back on December 8, 2022, the Bank of Canada raised the overnight rate again and as a result, prime increased to 6.45%. The overnight rate went up three more times after that, and topped off at 7.2% (which made prime 5%) in July, 2023. After almost a year, the overnight rate started lowering, dropping once on June 5, 2024, a second time on July 24, 2024 and a third time on September 4, 2024. As the overnight rate dropped, so did prime.

We’re now back at the prime rate we had at Christmas in 2022, but the market has not seen significant change in average prices in Toronto or any of the GTA since that time. On paper that means that our housing market is more affordable now than it was almost two years ago, at least for people financing their homes with a variable rate mortgage.

We say more affordable, but that doesn’t equal affordable. We’re going to have to go back a lot further to do an apples to apples comparison for prime rate to see how unaffordable real estate really remains here in the GTA.

### Wait, Apple makes phones now?

It was in 2007 that Steve Jobs introduced the first iPhone and while they are still around, they are quite different than the first one. That’s not the only thing that has changed since 2007, as we have seen incredible increases in average house prices in Toronto and the GTA since that time.

Despite the many chances since then, November, 2007 was the last time we had a prime rate as close to our current one. It was 6.25% rather than our 6.45%, but after November, 2007, it started decreasing and over the next number of years, it remained below our current level. This didn’t change until we hit it again in December, 2022 and then surpassed it, before coming back down again.

If variable mortgage rates were the same back in November, 2007, how did the lower real estate prices translate to mortgage payments and affordability? The answer is astonishing, so brace yourself.

### Oh, right, first, the methodology.

We wanted a broad review that gave us some specific results, so we looked up some key datasets.

First off, we looked at the average price for a detached house now (August, 2024) and back in November, 2007. We did that for Dufferin, Durham, Halton, Peel, Simcoe, Toronto and York, so we’re not going to just give Toronto focused, or GTA averages. Oh, just for fun, we also did it for December, 2022, when we last briefly saw this same current prime rate.

Secondly, we took those average prices for those three times, assumed a 20% deposit and calculated the monthly payments for an 80% down mortgage with a 25 year amortization, using the prime rate of 6.45%.

Finally, we applied the standard 32% maximum total debt service ratio to calculate what you would need to have as a gross annual income to afford a detached home in each of those areas, both back in 2007, as well as in 2022 and now.

Let’s see what we found.

### Welcome to Dufferin, hope you make 3X more than you used to make.

We’ll start with Dufferin, currently the most affordable place in the GTA to buy a detached house, with an average price of $949,000. That works out to over $5K a month in mortgage payments and in order to qualify, you’d need to make about $190K a year. Clearly, the “most affordable” doesn’t translate to “affordable” by most standards.

When we look back in November, 2007, you had to make about $59K a year to afford your mortgage payment of $1,560 a month on your $292,000 detached house. The interest rate may be the same, but the cost of the home means the income required has more than tripled since 2007.

This is unfortunately not the only area where incomes have had to rise drastically to be able to afford a detached home. In fact, in six of the seven areas we reviewed, incomes would have had to more than triple since 2007 to keep the same level of affordability for the current average detached house price. It will come as no surprise to you that this has not happened.

### When did Durham start having million dollar houses?

Moving on to Durham, the latest average price for a detached home is just over $1M, meaning you’d need a family income of over $200K in order to qualify for your monthly mortgage payment of about $5,400.

When we look back to 2007, the average price was $310K and a family making about $62,000 could afford a home in the area.

### Halton homes cost half a million. Oops, sorry, I mean one and half million.

Back in 2007, the average price for a detached house in Halton region was under $500K, meaning you could qualify for the mortgage and make less than six figures.

With a monthly mortgage of over $8,300 now for the average detached home, you better have a good job that pulls in over $300K gross. That’s assuming you have the 20% down for the $1.559M average detached house price!

### Peel is middle of the pack, but you still better have money.

The results for Peel put it in the middle of the seven areas that comprise the GTA. It’s cheaper than Halton, York and Toronto, but more expensive than Dufferin, Durham and Simcoe. As of right now, you need an income of $266,000 to afford the $7,100 a month mortgage payment on a detached home.

Back in 2007, Peel was still very much a bedroom community for commuters and you could buy your own detached home for just over $400K, on an income of $84,000. Ah, the good old days.

### Simcoe is no Dufferin, but it’s close.

When we turn to Simcoe region, it’s one of only two parts of the GTA where the average price remains below $1M. It’s a little bit more expensive than Dufferin, but not by much. Our current variable rate still means you’d need to have over $5K a month for mortgage payments, and you’d need to have a gross family income of almost $200,000.

Way back in 2007, a family income of $61,000 was enough to get you into the detached housing market, where about $300K would get you your own house, driveway and backyard.

### Wait, Toronto actually got a bit more affordable? Well, kind of.

Toronto was the only part of the GTA where we saw less than a tripling of the income required to buy a detached house. Before we start celebrating in the six, we’ll point out that the current average price for a detached home is the highest in all of the GTA, at almost $1.7M. That means your mortgage is over $9K a month and your gross income has to be around $339,000 to qualify.

The reason why Toronto didn’t have as big a jump in unaffordability is because it was already pretty unaffordable back in 2007. The average price of $614,000 was more than double a few other areas of the GTA, as was the income required to buy in the city. Toronto went up by 2.8x when we look at August, 2024 but given everywhere else was around 3.2x, it seems like it works out well if you start off being expensive.

### York comes in a very close second.

Finally, when we turn to York region, we have an average price of $1.665M, just a bit below Toronto. The monthly mortgage payment for the average detached home would be just under $9K, and you need a cool third of a million in annual gross income in order to qualify for the purchase.

York was pretty expensive back in 2007, with an average price of over $500K meaning you’d need to be clearing six figures to afford your $2,800 a month mortgage payment. It has more than tripled since then and at this rate might catch up with Toronto soon!

Despite the challenges in affordability that persist in the GTA, we are actively working with both buyers and sellers to help find the path forward. If you’re thinking about a move and want to understand your options, then we’d invite you to get in touch!