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A home for sale in Toronto’s Annex neighbourhood on July 18. Sale volume was up 11.1 per cent from July on a seasonally adjusted basis, according to a report from the Toronto Regional Real Estate Board.Fred Lum/The Globe and Mail

After several months in a slump, the Toronto-area housing market showed signs of strength in August as sales increased and price declines moderated on a month-over-month basis.

The volume of resales in the Toronto region fell 34.2 per cent in August compared with the same month last year. But that year-over-year decline masked a short-term increase: Sale volume was up 11.1 per cent from July on a seasonally adjusted basis, according to a report from the Toronto Regional Real Estate Board (TRREB).

TRREB added that the year-over-year drop was lower than in the prior four months.

The home price index, which excludes the extreme high end of the market, fell for the fifth straight month in the Toronto region. The typical price of a home was $1,124,600 in August, down 2.84 per cent from July and down 15.8 per cent from the market’s peak in March. The average sale price among all home types was up 2.1 per cent in August, compared to July.

Real estate activity has slowed across the country over the past several months, as the Bank of Canada has hiked interest rates in an attempt to bring inflation under control.

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Home prices are now declining quickly in places that experienced rapid gains during the pandemic’s real estate boom. That includes suburban areas near Toronto, such as Durham Region, where the typical home price jumped by nearly 90 per cent, or $568,400, in the two years from March, 2020.

Home prices in Durham, which is located to the east of the city, are now down 20.6 per cent from their peak in March, according to TRREB data. To the west, in Halton Region, the home price index has declined 22.9 per cent over the same period.

Buyers are now waiting to see what Canada’s central bank will do on Wednesday, at its scheduled interest rate announcement. Economists expect the bank to hike its benchmark rate by at least another half a percentage point. Currently, the benchmark interest rate is 2.5 per cent. In early March, it was 0.25.

“Buyers know that interest rates are being raised in a few days and they’re like ‘let’s see what’s happening,’” said Natalie Lewin, a realtor with Keller Williams Portfolio Realty. “A lot of people are trying to time the market.”

The federal government requires prospective mortgage borrowers to prove they can make payments at interest rates that are at least two percentage points higher than their mortgage rates. With interest rates on five-year fixed-rate mortgages near 5 per cent, many borrowers must now qualify at around 7 per cent.

It has become more difficult for would-be buyers to qualify for mortgages large enough to finance home purchases in Toronto, where the typical home price is above $1-million. And homeowners who already have mortgages also face higher costs.

Rising interest rates have increased borrowing expenses on variable-rate mortgages, which have rates that fluctuate along with a lender’s prime rate. And even borrowers with fixed-rate mortgages could be in for higher payments if they need to renew while interest rates are elevated.

As a result of increasing borrowing expenses, private sector economists are forecasting that Canada’s average home price could drop through 2023 by as much as 25 per cent from the market’s peak in the spring.

Even with that drop, home prices in Canada would remain above prepandemic levels. Compared with last August, the home price index is up 8.85 per cent in the Toronto region.

With a report from Rachelle Younglai

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