Bank Of Canada’s Surprise Rate Hike! What Does This Mean For Toronto Real Estate 2022

Bank Of Canada's Surprise Rate Hike! What Does This Mean For Toronto Real Estate 2022


A 100 basis point rate hike is the biggest increase since 1998 and a huge shock for most economists who’ve been expecting 75 basis points! We’ve already seen a huge slowdown in real estate activity, and this bigger than expected rate hike is definitely going to push a lower price floor for real estate. 

But we think that the investor markets and the average end user markets might end up moving at a difference pace based. So in this video, let’s take a closer look at these differing behaviours and how the real estate markets in Toronto might be moving for the rest of the year.

Proactive vs. Reactive

We know investors make decisions based on numbers and facts. And because we all expect interest rates to keep going up, we’re seeing a lot of investors being more proactive these days using future expected interest rates to crunch their numbers. So even though we just saw a 100 basis point rate hike which takes variable rates to around 4%, more investors are actually using much higher interest rates for their projections. 

There’s three more rate hikes left for this year. Another big one in September, possible 50 to 75 basis points, then maybe two smaller ones at 25 basis points each in October and December, and so this will take us to a possible 5.25% by year end which is starting to be the rates that more and more investors are using in their calculations. 

What this means is that even though future interest rate hikes haven’t happened yet, their impact may be already getting priced in for investment properties. And so, as more and more investors do this, we’re likely going go see prices fall a lot more quickly in these markets throughout Q3 and bottom out sooner than the general market.

Now I have to be clear that this won’t happen everywhere. End users, especially new home buyers, usually buy based on what they can afford at the current moment, and unfortunately, they are more likely to stretch themselves too thin. End user home buyers are usually more reactive and pivot based on what they’re currently faced with, and so there could be a bigger lag between when rate hikes happen and where real estate prices might go. 

During the last round of rate hikes, Toronto semis saw a much quicker recovery compared to 905 detach homes. You can see that 416 semi prices actually went up by the end of the rate hike cycles, whereas 905 detached homes stayed more or less at the same spot. 

So our theory checks out – there’s a bigger investor pool in semis in Toronto and more end users in the suburbs. So if history repeats itself, then we might expect price drops to be priced in earlier for investment property markets, whereas we might continue to see more downward pressure throughout the rate hike cycle throughout this year and into next year in the end user markets.

Other Indicators: Listings, Sales, SNLR

Besides proactive versus reactive, holding power is probably a bit different too. If you’ve watched my videos before, you’ve probably heard it already. Investors tend to have stronger holding power because rents are on the rise, they might have a bit more cash flow buffer to begin with, and now they’re also future-proofing their positions. And then if we compare different locations, we also think that Toronto home owners might be able to wait things out a bit better than the suburbs.

New listings have come up year over year in the GTA, whereas they dropped in Toronto. And if you look at Toronto homes only, semis seem to have even better holding power compared to detached homes and these differences are probably related to holding power. 

Honestly, it’s hard to tell from one month’s data, but it’s interesting that TRREB also pointed out the same thing in their latest market watch summary, saying that listings will be an important indicator to watch out for in the next few months which might be an indication of how much strength the market has.

What else should we watch out for? Sales is another one but this is very much a lagging indicator. But perhaps because it is lagging, once sales improve, it’ll be pretty obvious that things are improving. 

And then if you want a more complete picture, I always go back to my favourite indicator, the sales to new listings ratio, where you can really see the listings and sales dynamics a lot more clearly and if this ratio starts to improve again, then this would be another positive sign that we might be approaching the floor for that specific submarket.

Interest Rate Expectations

The last thing we should keep in mind to track any changes to interest rate expectations. We saw a massive 100 basis point rate hike which was more than the 75 basis point expectation. The Bank of Canada is saying they’re trying to front load the hikes to avoid higher rates in the future so 100 basis points each step so probably the max and perhaps we might see it working and rates hikes start to slow down. 

Now if it actually goes according to play and maybe even better, things might start looking better. For example, instead of a 5% variable rate by year end which is what a lot of people are expecting now, if we end up seeing slightly lower interest rates, this might help to trigger a real estate U-turn on the investment property front sooner. 

A house with 3 units getting $2500 plus $2,500 plus $1,600 in rents each month at our current future proof variable rate of 5.25% means we’ll have to buy at $1.27M just to stay cash flow positive. But if we end up seeing variable rates only reach 5% instead of 5.25%, then that house can sell at $1.31M to be in the same cash flow position. In other words, we’re looking for any downward adjustments to interest real expectations nowadays for a turning point for investment properties.

Of course, we’re in a very dynamic market and things are changing all the time. If we continue to get actual rate hikes higher than expectations, we’re going to keep seeing a lower floor for real estate. So, we’ll just have to keep monitoring all of these changing factors more closely.

How We Can Help

Here on our team, we’re a real estate sales brokerage that focuses on investing in Toronto, and so I you want to talk more about Toronto real estate, or if you want to learn how to get started with invest in real estate in Toronto, just reach out!

We’d be happy to take a look at your situation and give you our best recommendations on how to get on the right track. Once you’re ready to buy, our sales team will help you buy it, offer renovation guidance, and help with leasing or property management if you need it. So just connect with us if you want to learn more about our services!

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