Toronto vs Suburbs: What Happens To The GTHA Real Estate Market When BoC Interest Rates Go Up 2022?

Toronto vs Suburbs: What Happens To The GTHA Real Estate Market When BoC Interest Rates Go Up 2022?


A few weeks ago, we shared CREA’s 2022 forecast for price growth across Canada and highlighted the fact that Ontario was the front runner at 11.5%, outpacing the rest of Canada, which averaged at a much lower 7.6%. After that, we got a request to do a growth breakdown within Ontario. Now, most people watching our channel are based in Toronto and prefer to invest somewhere within driving distance, so do this growth breakdown and zero in on the Greater Toronto and Hamilton Area.

If you’ve been following the real estate market, you probably know what’s happened. UBS said 2021 was the “end of urban outperformance” around the world, and Toronto was no exception. Going directly the numbers, the suburbs did outperform, averaging 60% in price growth throughout COVID, whereas Toronto was lower at 27%, even if we ignore condos, which wasn’t nearly as high. 

Honestly, that’s still very good, but if you compare on a relative basis, the suburbs did much better. But now, we know we’re slowly making a COVID recovery, and the economic situation is changing with rising interest rates. In this video, we’ll take a deeper look into how prices in the GTHA will move in the next few years. Based on what’s happened in longer term history and over COVID, we’ll give our predictions on where the best areas in the GTHA might be to invest moving forward.

What Drives Real Estate Prices In the GTHA?

Before I start, we want to remind you that this information is for educational purposes only and not financial advice. We recommend that you do your own analysis and speak with a financial advisor directly if you need help with investment decisions. 

In one of the previous videos I made, I compared how detached properties, semis, and condos in the 416 Toronto area performed, and the conclusion was that semis, which can be generalised to include all freehold investment properties, make the most stable and best investments in Toronto. 

After that video, we had a lot more interest from investors looking for freeholds, but we wondered if this applied to the 416 area only or whether this was the same across the GTHA. If you want a short answer, there is a difference, and the freehold investment outperformance as interest rates go up is specifically for the 416 area. 

When it comes to real estate, there are a couple of things that impact how the market moves. First of all, the further you go away from the core, the purchase price tends to be more affordable, but because of that, there’s also a smaller proportion of renters further from the core. In other words, you’d have lower priced properties and more end-users in the suburbs compared to the 416 area.

What Happens When Interest Rates Drop?

Now assuming we’re looking purely from an investment lens, let’s see how 416 semis performed over history compared to Oshawa, Newmarket, and Hamilton.

We’ll start with the end of 2014 first, this was the previous cycle when rates started to drop. You can see that rates dropped starting in January of 2015 and then held stable and low for a period of 2.5 years. Now, if you entered the real estate market in 2014, you would have done the best by 2017 if you bought in the suburbs. Hamilton gained the most during that period, followed by Newmarket, and then Oshawa. On average, those three cities saw 68% growth in prices, whereas Toronto saw a 41% gain.

Looking at our current cycle over the last 2 years, this trend repeated again. What’s even more clear is that because of the extra COVID and work from home effect, the suburbs did even better relative to Toronto this time around. And you can also see that growth moved in line with the price point. Oshawa is the most affordable so it saw the fastest growth, followed by Hamilton, followed by Newmarket. On average, these three cities saw a 63% gain, whereas Toronto grew by 27%.

What Happens When Interest Rates Rise?

Now, let’s see what happens when interest rates make a U-turn and start rising. As interest rates rose from June of 2017 to March of 2020, the area that grew the most during the almost 3-year period was Toronto. Newmarket only grew 1% over 3 years, while Hamilton and Oshawa gained 21%. On average, these cities grew 14%. So if you invested in real estate in mid-2017, you would have made 19% more in Toronto compared to the suburbs by 2020.

Who Will Outperform?

If you’re wondering about rent yields, they’re pretty similar all across the board nowadays. Before the spike in prices in the suburbs, you might have been able to get better rent yields further away from Toronto, but now that prices have shot up so much, we’re looking at very similar 3.5-4% net rent yields everywhere. 

In other words, the biggest thing that affects returns is really appreciation, which is driven by budget. Right now, the suburbs are still priced lower, but it’s not nearly as much off as before. You’d need around $200K of capital to invest in a house in Hamilton or Oshawa, and $280K of capital in Toronto if you want better growth moving forward.

Another interesting thing to point out is that when rates dropped in 2014, the suburbs outperformed Toronto by more than half. But this time around, the suburbs doubled Toronto’s growth, and that’s probably the extra COVID impact. Realistically speaking, spending more time working from home will be a permanent change for many people, so I don’t think that the COVID shift will fully unwind. 

Even still, it’s not unreasonable to think that some of those who left might come back to their core if they can’t stand living so far away from all of the action. So, on top of the regular outperformance in Toronto when interest rates rise, it’s also possible to see an extra COVID recovery bump for Toronto.

But let’s just assume that Toronto outperforms by 19% this time around when rates rise, similar to what happened last time around. Once you factor in leverage, because we’re using borrowed money to make more money, we’re looking at over 75% more in ROI. On a $280K investment, that’s $213K more in absolute returns, which is huge. For this analysis, I kept it simple and chose three cities from the GTHA, all of which are at the extremes. 

Places around the GTA, like Markham or Mississauga, are in fact somewhere in between the cities that I analysed. I’ll be posting their some of the other numbers on our social media accounts, so you can head there to get more insights if you’re interested.

How We Can Help

Here on our Elevate team, we focus on real estate investing in core 416 Toronto and we know how this market works inside out. So if you’re ready to invest in Toronto and you want a team that can show you the best deals out there, we’d be happy to connect.

We can look at your requirements and preferences and then match you up with an 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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