July Rate Hike Might Be 75bps From The Bank Of Canada! What Will Happen To Toronto Real Estate

July Rate Hike Might Be 75bps From The Bank Of Canada! What Will Happen To Toronto Real Estate


Inflation continues to be much higher than expected, and so the central banks are on the fast track to raise rates faster than we’ve seen in two decades. There’s been more talk lately about how the next rate hike might be 75 basis points.

Remember, a normal rate hike is 25 basis points, and 50 is considered big, and 75 basis points is extremely rare. But when the Bank of Canada was asked about this specifically, they didn’t say it’s not going to happen, which is a tell-tale sign that bigger rate hikes might be coming soon.

So, in this video, let’s look at what might happen to our Toronto real estate market if interest rates go up even faster.

Impact To Existing Home Owners

There are a few ways of looking to see how further rate hikes might affect the housing market. On the existing home owners’ side, those who got in at record low rates will feel the most pain on renewal when overnight rates reach 3%, which means variable mortgage rates will be around 4.5%. If someone had a $1 million property, they would see a 38% increase, or over $1,100 in monthly mortgage payments, which would be a huge shock all at once.

According to a new debt survey by Manulife, which was done in mid-April, just after the second rate hike, 18% of Canadian home owners already said they couldn’t afford their homes. And then one in four homeowners said that they would have to sell if interest rates go even higher-which they already have since mid April and will continue to rise, so this is definitely worrying.

The counter argument is that this is just a survey and what actually happens might be a different story. These home owners were stress tested at an interest rate of 5.25% to prevent situations like this, so technically, they should still be able to hang onto their homes even with much higher mortgage costs.

Impact To New Home Buyers

Even if existing homeowners are alright, higher interest rates definitely affect new home buyers. Assuming we still have 1.5% of rate hikes to go, home prices will have to drop another 17% to keep mortgage payments the same if variable rates go from 3% to 4.5%.

If the next rate hike is 75 basis points, then we’re looking at an 8% drop from today and then another 9% drop after that. New home buyers might run into a hard cap from lenders too because the stress testing conditions are also changing.

We won’t get the 5.25% stress test rate anymore and it will transition to be 2% higher than our contract interest rates. So, when variable rates get to 4.5 percent, we will be tested at 6.5% instead of 5.25%.

This effectively translates to a drop of 11% from a borrowing capacity standpoint, even if they can handle bigger monthly payments, and that will definitely be a much more concrete force to push real estate prices further down.

Historical Trends & Forecast

Based on all of this information, Canadian real estate prices will probably see a low double digit drop in prices from today. When prices come down, they usually give back the excess gains from the ride up to balance things out.

For example, at the peak in the 80s, Toronto real estate prices went up 24% above the 10 year moving average in 1987, and so when prices came back down, they came down 20% below the moving average in 1990. In 2016, average prices rose 10% above the moving average; in 2018, prices fell 12% below the moving average before returning to normal.

In our current cycle, 2021 average prices went 9% above the moving average, so it’s likely to see a drop 9% below the moving average this year as prices come down, which means we aren’t expecting much of a price change compared to 2021 average prices.

But remember, we’re talking about average TRREB prices for the whole of 2021, and prices have gone up a lot more since then. We’re at around $1.2M right now for May. And so we will need another 10% drop from now to get back to the $1.1M average price for this year. And to get to that average, the lows will probably end up being even lower than 10%. 

Another question you might be wondering is how long will it be before prices take a U-turn, and that is anyone’s guess. If you want us to take a stab at it, we like to defer to past trends, and history tells us that downturns are usually sharper and shorter than the way up.

Since we went for a period of around 2 years for the upcycle, we might see the U turn point closer to the end of this year before returning back to normal by the end of 2023 as a whole, if we look at Toronto and the GTA.

But there will be differences depending on where you are in the city and what type of property you are buying. We do think that prices in the 416, especially for investment properties, should see less drop, and the suburbs should see more damage, and you can watch this video to hear more about it.

Other Insights

You’ve heard us talk about this before, and we just want to bring it up again. Even though prices are coming down, it doesn’t make it a bad time to buy now just because we are in a very strong buyer’s market at the moment.

If a property isn’t moving on the market and the seller ends up accepting your offer that’s 15–20% discount off today’s prices, you might end up getting prices comparable to what you get at the bottom of the U or better.

The plus side of buying today is that you lock in lower mortgage payments, which makes cash flow look better. It’s also a more comfortable buying experience—for example, it’s easier to put in financing and inspection conditions nowadays, which makes for a much less stressful process. 

How We Can Help

So, if you are contemplating what to do in this buyer’s market, let’s chat. As experts in real estate investing in Toronto, we can look at your situation, set you on the right path, and help you find an investment property that’s great for you.

After we help you buy it, our team also provides renovation guidance, leasing and property management if you need it. Just connect with us if you want to learn more about our services!

Want To Get Started With Real Estate Investing In Toronto?

We’d be happy to learn more about your situation and help you find the best investment opportunities for you.