Latest interest rate hike jolts Toronto real estate market

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For many buyers and sellers immersed in the spring rejuvenation of the Toronto-area real estate market, the Bank of Canada’s recent interest rate hike came as a sudden jolt.

The central bank’s rate-setting committee raised the benchmark rate by 0.25 points to 4.75 per cent in June after recent data showed the country’s economic growth was surprisingly robust in the first quarter. The Bank of Canada had paused a series of rate hikes earlier this year as the rate of inflation fell towards its target rate of two per cent but it has remained stubbornly high.

Industry professionals say calls flooded in from potential buyers, investors and existing homeowners as they grappled with the possible repercussions. Showings also slowed down in the days after the announcement as aspiring buyers absorbed the news, they said.

Now, insiders are watching to see if the shock wears off quickly.

One immediate effect, predicts Leah Zlatkin, a mortgage broker and expert with LowestRates.ca., is that many potential buyers with preapproved mortgage agreements will rush to use them within the next few weeks.

Still, Ms. Zlatkin is advising those entering the market for the first time to try to strike a deal before their preapproved mortgage agreement expires.

“That’s a very risky position for most young buyers to be in,” she said. “If you’ve got a preapproval in hand, go out and do your shopping.”

Ms. Zlatkin said she expects the market to remain hot for the next few weeks as people rush to put those agreements to use. She said buyers who don’t have an active preapproval may feel less urgency, while other buyers may bow out all together because they’re so shaken.

Ms. Zlatkin said that for homeowners who were holding out hope for a rate cut by the end of the year, the June 7 increase was the limit. She noted that existing homeowners with a variable rate may find the latest hike causes them to hit their trigger rate, when the interest applied exceeds their payment. People in that situation need to talk to a mortgage professional, she said.

Pritesh Parekh, real estate agent with Century 21 Legacy Ltd., said the announcement was a surprise for many. For investors who bought in early 2022, their monthly cash flow was manageable, but now they’ve seen nine interest rate increases from the Bank of Canada.

He said investors who bought properties to rent out are often paying significantly more each month in mortgage repayment and expenses than they receive from tenants.

“This may have been the last straw for some owners.”

Mr. Parekh said existing owners who want to move up the property ladder may still be able to do so because they have the ability to adjust their budget in line with the latest increase in borrowing costs, but first-time buyers looking at lower price points are being hurt even more.

“This is knocking so many people off the bottom rung of the ladder.”

John Lusink, president of Right at Home Realty and Property.ca, said some buyers may tap the brakes as they adjust to the news. “Up until then, we’ve seen a healthy increase in transactions,” he said. “It will be interesting to see if this quarter-point hike will apply the brakes again.”

Even before the announcement, listings were increasing earlier this month following a rebound in May, which saw the average price recover to within about 10 per cent of the peak in February, 2022.

Sales in the Greater Toronto Area jumped 24.7 per cent in May compared with the same month last year, according to the Toronto Regional Real Estate Board. New listings fell 18.7 per cent last month from May, 2022.

Compared with April, sales rose 5.2 per cent on a seasonally adjusted basis.

In May, the shortfall in supply compared with demand led to more competition in the GTA, according to TRREB chief market analyst Jason Mercer.

The average price in May reached $1,196,101 in the GTA to mark a 1.2-per-cent dip from the same month last year. Compared with April, the average price edged up a seasonally adjusted 3.5 per cent.

Mr. Lusink said the GTA has bounced back more quickly than some other regions in Ontario. While bidding contests have returned in some neighbourhoods in the Toronto area, helping to contribute to the uptick in prices, areas such as Barrie, Ottawa, Niagara and Windsor have longer days on market.

When it comes to existing homeowners, Mr. Lusink said banks have so far softened the impact by allowing many customers to extend the amortization period from the typical 25 years to 35 or 40 years in some cases.

Mr. Lusink expects sales to continue at a steady pace throughout the summer and he predicts demand will continue to outpace supply.

But he cautioned that each rate hike makes it more difficult for potential buyers to qualify for a mortgage.

As for the months ahead, the outlook is a little murky, Mr. Lusink says. He figures rate cuts in 2023 are likely off the table. There’s also a chance the economy may enter recession.

“It’s the fall I would be more worried about if we don’t get inflation under control,” he says, pointing to the possibility of another hike this year. “If there’s yet another, I think the parking brake will be pulled.”