Are We In A Buyer’s Market? Steep BoC Interest Rate Hikes Will Take Down Toronto Real Estate

Are We In A Buyer's Market? Steep BoC Interest Rate Hikes Will Take Down Toronto Real Estate


After the massive US fed rate hike of 75 basis points last week, traders in overnight swaps are pretty much fully pricing in a 75 basis point rate hike here in Canada next round on July 13. 

If you are just looking at real estate prices, it might not seem like a buyer’s market yet because the prices don’t appear all that different for now. But even with the baby step rate hikes that we saw in March and April, the reality is that the tables have already turned and now we are in a buyer’s market. 

So in this video, I’ll reveal what‘s happening lately in Toronto real estate and take a deeper dive into how higher interest rates will continue to take us further into deep buyer market territory.

TRREB May 2022 Data

Real estate data is a lagging indicator, and as of the latest May data that we have, we have only experienced two smaller rate hikes totalling 75 basis points. But even then, it was clear that the Toronto real estate market had already been shaken up. 

So what exactly happened? No, we didn’t see more listings. In fact, in May was actually very similar to the same period last year. The big change was on the demand side, where buyers dropped by 30 to 40% on average. It’s really because of this big drop in demand that takes the sales to new listings ratio in Toronto to below 50%, and that is a clear indication that we’ve already entered buyer market territory. 

The biggest pain is being felt in the suburbs as of May, with prices going down 17 to 19% from their peak-this is drastically more than in the 416, where house prices have dropped by less than half of that, going down around 8%. If we slice things another way, you’ll notice that condos in general have been seeing a lesser impact compared to houses-keep in mind that it’s because they have gone up a lot less throughout the pandemic too.

Sold prices are coming down based on data, but there are a lot of listings out there that are still very high. Basically, sellers are still holding out for higher prices, and so we are seeing higher days on market, list low plus offer date situations that don’t get sold, and so they get turned into anytime offers at a higher price that the seller actually wants to sell for. 

But these are generally leading indicators that the market is about to drop, and with more major rate hikes in the pipeline, prices are probably going to come down more very soon.

What Happens To Real Estate If We See Steeper Rate Hikes

Besides expecting a jumbo rate hike at 75 basis points next month, we are expecting our target rate to go beyond 3% based on the US Fed’s latest projections. As of last week, the Fed is expecting rates to go up to 3.4% by the end of this year and 3.8% by the end of next year. 

And for us in Canada, we pretty much have to match pretty closely to prevent our currency from tanking, so we are probably going to get similar target rates here too. Here’s the thing: It’s much easier for the real estate market to absorb the impact of interest rates when there are normal step hikes of around 25 basis points. 

A 25 basis point hike on a $1.2 million house means an increase of a bit over $100 in monthly mortgage payments. But it gets increasingly hard when rates are at 75 basis points, which is close to a $400 increase in one go.

Even if someone is able to afford higher mortgage payments, what you end up seeing is that new buyers will run into a lower borrowing ceiling from lenders, and that is a concrete force that will take real estate prices down. 

A one-time bump of 75 basis points in interest rates means that the mortgage capacity gets reduced by 5%. When target rates get to 3.8%, that ceiling will get reduced by a much bigger 19%. and so prices will have to come down a lot more based on the combined forces of weaker holding power and quickly dropping loan ceilings from new buyers. 

I’d say the biggest impact is always in the end-user markets because the home owner needs to absorb all of the increased costs. If variable rates get to 5.3%, we’re looking at $1,150 in increased mortgage payments on a $1.1M end-user home from today, so prices would have to come down 22% just to keep expenses the same. 

Toronto Investment Property Advantage

Toronto investors are benefiting from rental income, which helps shoulder some of the increased costs and actually changes the picture quite a bit. 

Right now, we see a $500 positive cash flow on a $1.1 million investment. When variable rates get to 5.3%, what we need for a property to cash flow is for prices to come down by 13%. We are in a rebounding rental situation in Toronto, and if rents come up by around 5%, prices will still cash flow with a much smaller 8% drop. 

So, simply put, we do expect investment properties in the 416 to experience a much softer landing compared to the general real estate market.

Final Thoughts

But even so, it’s clear that prices will continue to tumble everywhere with these major hikes in the works, and so it is completely reasonable to see many investors in a wait and see mode. 

We do see people holding a lot of cash, and obviously waiting too long in this highly inflationary environment isn’t the best idea either, so we recommend that you get ready to buy with pre-approvals lined up. 

Honestly, it’s already a buyer’s market and we’re going to see very good buying conditions over the coming weeks, which is coming a lot sooner than many people expected because of these exceptionally steep rate hikes.

How We Can Help

Just remember that we are in extraordinary times right now. Prices are pointing down, and so it is crucial to be wise with your investing decisions. 

If you are contemplating investing in real estate in Toronto soon and want to talk things out, just reach out to us. We would be happy to look at your situation and help point you in the right direction. 

Once you’re ready to buy, we can help match you up with the best investment property that fits your needs. And that’s not all-our team also provides renovation guidance, leasing and property management if you need it. So, just connect with us if you want to learn more about our services!

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