More Interest Rate Hikes In September From The Bank Of Canada

More Interest Rate Hikes In September From The Bank Of Canada: How Will This Affect Toronto Real Estate?


The faint hopes of the central banks’ slowing down rate hikes got squashed last week when US Fed Chairman Jerome Powell said that they will continue to raise interest rates in the coming months, which will cause pain for households. 

If the Fed shifted gears and decided to slow down rate hikes, that would be plan B, which would be positive for stocks and real estate. But now that the original plan is now affirmed, this just means nothing will change and we’ll go ahead on schedule with our next rate hike in Canada on September 7.

Right now, the majority think that rates will increase somewhere between 50 and 75 basis points, and I’m pretty sure we’re going to see some more scary headlines for Toronto real estate after that. The media is made to induce anxiety, and at the same time, it might not give the full picture. So in this video, I want to try to read past the scary headlines and truly understand how the next rate hike might impact the Toronto real estate market.

Bank of Canada Interest Rate Forecast

If we take a look at the latest 2 year bond yields, you can see that we’ve reached the highest rate since 2007. In simple terms, this just means that consensus is now betting on more rate hikes. Right now, the Bank of Canada’s target rate is at 2.5% and the central banks have already said that they will front load rate hikes to try to tame inflation quickly. 

If we look at the forecasts, the big banks see target rates going up for the next few months, with the bigger jumps in September and smaller jumps in October and December, and then peaking at between 3.25 and 3.5% by year end. And based on this, mortgage variable rates should peak somewhere between 4.75 and 5%.

Impact On Investment Properties

So let’s cut to the chase and see how this might affect real estate. Honestly, in our investment analysis projections, we’ve been using variable rates of around 5% for a while now to figure out what is a good price to buy. So if the Fed is sticking to the same plan as before with more rate hikes, which was as expected, nothing changes on our end. 

At current levels, with future proof rates of 5%, we’re seeing deals with good cash flows, and our clients are starting to buy. Of course, not everyone is as in tune with the market as I am, but more and more people are going to notice this soon, and more buying action is going to give support to investment property prices.

Impact On End User Homes

The end-user side is a different story. Homebuyers here are much more likely to buy based on what they can afford at the time. If their mortgage rates are at 4%, they’re going to use 4% to figure out how much they can borrow, and that will be the maximum price they’re willing to pay for a home. Once mortgage rates rise to 4.75%, they won’t be able to borrow as much, and that’s going to lower the ceiling for their purchase price. 

Based on the CMHC calculator, if mortgage rates go up by another 1%, at the peak, if rates go from 4% to 5%, the amount end-user home buyers can borrow will have to drop 8% from today. The key difference here is that future rate hikes haven’t been priced in by end-user buyers, and so prices in end-user markets will continue to react, lag, and fall as interest rates go up.

When Is The Best Buying Opportunity In Toronto?

I think that even though the investment market does have stronger support, the power of confusion and fear is pretty strong and we’re going to see more weakness in both the investment and end-user markets after September’s rate hike, which is also expected to be big. 

Real estate is an easy target for news, and it will scare off sellers in the investment property market too, which means more investment property buying opportunities in the fall. Remember, the real estate market isn’t as efficient as stocks, and even though the general investment property market might be stable, there could be a potential that you meet a seller who might let go for a lot less because of fear. 

Here’s the thing. The numbers are already working on many properties based on forecasted peak mortgage rates, and we’re already seeing good cash flows. Any future price drops from here on will give you the Black Friday deal of the year. So if you see it, act quickly, because it could be as good as it gets. Once we see clearer signs that rates will be stabilizing closer to the end of the year, the investment property market will see a much quicker influx of investors. This will give stronger support to prices and translate to a less buyer-friendly environment with more buying competition, fewer conditional offers, and more time-sensitive decisions.

How We Can Help

So what do typical investment property deals in Toronto look like these days? Right now, we’d say that it’s possible to get a house in Toronto for around $900K with major renovation work needed of around $100K, and after you do those upgrades, you’ll be generating decent positive cash flow of at least $200 based on a 5% mortgage rate. 

And if you want to get more details on opportunities like this, just reach out to us. We’re a real estate sales brokerage that focuses on investing in freeholds in core Toronto, and we search the market daily to find the best deals out there. We can look at your requirements and preferences and then match you up with the best investment property that fits your needs. 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.

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