BoC Hiking Mode Is Back: Analyzing the Impact Of More Rate Hikes In 2023 On Toronto Real Estate!

BoC Hiking Mode Is Back: Analyzing the Impact Of More Rate Hikes In 2023 On Toronto Real Estate!


Let’s talk about the rate hike this week. While the news made it sound like a big surprise, but the market was actually going in with a 50/50 chance. 

Realistically, I think it was less of shock compared to some of the other rate hikes we’ve seen in the past year … although, we’re all feeling it a bit more as home owners if you’re on variable rates or about to renew your mortgage. 

Now it looks like the BoC has stepped out of the sidelines, and they’re sounding a lot more hawkish these days and so we might be expecting at least another rate hike this week. 

In this video, let’s talk more about the lingering impacts for home owners and buyers, updated rate outlooks from economists and then see how all of this will tie into where Toronto real estate is going. Let’s dive in.

Interest Rate Hike Effects on Buyers

First off, let’s see how this rate hike continues to affect mortgages. For active buyers, the immediate impact might not be as severe if they had a preapproval locked in at lower rates. 

But once those expire, then purchasing power will decrease. What’s happening these days is that even though target rates and variable rates are going up, realistically most people are going with the lower rates which are 3 year fixed rates.

From the lows around 4.8% in March, the next two rate hikes have been pretty much priced in current fixed rates and that’s why it’s now sitting at around 5.3%. What this means is that if buyers need to refresh their rates, purchasing power will decrease by around 5%.

Interest Rate Hike Effects on Existing Homeowners

Next, let’s look at existing homeowners with variable mortgages and trigger rates. By now, most variable mortgage holders’ principal payment portion has already been absorbed. So basically, every rate hike means that monthly payments will go up if you’re a variable rate holder. For a $1 million mortgage, each 25 basis point increase is around a $200 increase in payments. So unfortunately, it continues to bleed.

But perhaps the ones who will be toughest hit all at once are those on fixed rates who need to renew soon. Say someone bought during COVID and locked in a 2 year fixed rate at 2.5%. Now If they need to renew at 5.3% soon, their mortgage payment on a $1M loan goes from $4,000 to $5,300. That’s $1,300 all at once so that’s got to be the most painful of them all.

What's Next? Interest Rate Forecasts from Economists

It’s going up, and so your natural next question might be, what’s next? Well, the Bank of Canada wants to see inflation hit 3% by summer. But when we look at 3 month measures of core inflation, we’re still much higher than that at 3.5% to 4%. 

The economy is pretty strong. We have strong GDP growth, a robust labor market, thriving housing market, and solid consumer spending. Plus, the time between this and the next rate decision is actually shorter than typical. So realistically, it’s hard to imagine drastic changes in just 4 weeks before the next meeting.

Because of this, Scotia predicts a possible 25 basis point hike in July, depending on the data. RBC agree. They add that if 4.5% wasn’t enough to cool inflation, then 4.75% probably isn’t either. In other words, another hike is imminent. BMO shares a similar sentiment, suggesting that if the data remains firm which is very likely, we can expect another 25 basis point hike in July. And perhaps the most confident one comes from TD who fully expects another hike in July because BoC is back in hiking mode.

What Does This Mean For Real Estate Prices?

Rate hikes usually mean real estate prices drops, and it’s likely going to happen again. But this time around, we’re not taking about rates going from 0.25% to 4.25% in under a year, but possibly a half a percent increase. So, the softening should be much less severe and we’re likely going to enter into more of a balanced market, which should be healthy for real estate.

We’ve already started to see the real estate market start to balance out. There’s more listings coming onto the market, and summer is coming which is typically softer for real estate in general. What we predict is that this new round of rate hikes is going to cut down on the FOMO mentality and prices might soften overall by around 5%, which isn’t out of the normal. I’s not just a seller’s market anymore; buyers have a better chance these days too.

Homeowners feeling the pinch, we understand your situation. Holding power continues to weaken, but the good news is that we really are much closer to the peak. Although rates aren’t expected to come down anytime soon this year, these hikes are intended to bring inflation back to 2% sooner rather than later. 

So, while it might be short-term pain, it should lead to long-term gain. Economists predict rates to come down by mid-next year, which will help balance cash flows, prices, and rents more effectively. Now, if you’re in the market to buy, there will still be opportunities for great deals if you find the right seller.

And right now even though you might end up getting similar buying conditions with less stress just like the summer of last year, I would argue that it’s a more predictable environment with less uncertainty compared to the same time last year.

We are seeing more positive signs that inflation inflation has been coming down because of the aggressive rate hikes last year and we are much closer now to the end of the full rate hike cycle. And unlike last year with peak uncertainty, it’s a more predictable environment these days as we’re approaching the end of the full rate hike cycle.

Elevate Accelerators

We mentioned Elevate Accelerators last week, and we’re bringing it up again because sign-ups are still open until the end of this week. 

Elevate Accelerators is a new powerhouse community we’ve created where we’ll share our Toronto real estate investing secrets with a small group of like-minded members, capping each meeting to 20 people. 

We have a fantastic lineup of topics, and you can find all the details on our Elevate Accelerators webpage. Head there to check it out and apply before the limited applications deadline on Friday, June 16. Don’t miss out!

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