Varun Kohli July 17, 2023 No Comments

Toronto’s real estate market experienced a notable shift in demand-supply dynamics last month, attributed to the Bank of Canada’s decision to resume its rate hiking cycle. Tembo would like to highlight a recent real estate research report from RBC that indicates that home sales in Toronto declined by 6.9 percent in June, following a surge of 32 percent in April and May, when interest rates were held steady. As the central bank raises rates and moves towards a more balanced market, the rapid appreciation of home prices may start to slow down. This financial blog post delves into the details of the report, shedding light on the recent trends and potential implications for buyers and sellers in the Toronto housing market.

The Rebalancing Act:

According to the RBC report, the resumption of rate hikes by the Bank of Canada has triggered a sharp rebalancing of demand-supply conditions in Toronto’s real estate market. Economists Robert Hogue and Rachel Battaglia highlight that while home prices continue to appreciate, the pace of appreciation is expected to decelerate in the coming months. In June, the area’s MLS composite benchmark price rose by 2.5 percent month-over-month to reach $1.16 million. However, the report suggests that the surge in Toronto home values, which led to an 8.9 percent increase in benchmark prices since February, is unlikely to be sustained.

Increasing Supply and Moderating Prices:

RBC acknowledges that the number of homes available for sale increased in major markets, including Toronto. Although this growing supply hasn’t significantly eased upward price pressure thus far, a continuation of fewer buyers and more sellers could lead to a moderation in price growth. The report emphasizes that the initial rapid rebound in markets like Toronto and Vancouver was unexpected, and the future trajectory is likely to be more measured. These market dynamics indicate a potential shift towards a buyers’ market, where housing supply exceeds demand.

Impact of Higher Interest Rates:

With higher interest rates, affordability remains a significant challenge for prospective buyers. RBC emphasizes that the current market conditions, despite a modest decline in average and median prices, continue to pose extreme challenges for buyers in terms of affordability. While the Toronto Regional Real Estate Board’s seasonally adjusted metrics show steady prices on a month-over-month basis, RBC suggests that further rate hikes could potentially exert downward pressure on prices.

Market Sentiment and Uncertainty:

The decline of 6.9 percent in seasonally adjusted sales, alongside uncertainty surrounding inflation and interest rates, indicates a cooling market that extends beyond the usual summer slowdown. John Pasalis, President and Broker of Record at Realosophy, suggests that the market may be moving towards a buyers’ market, but the specific metrics defining it remain subjective. However, the upcoming fall season remains uncertain, as the impact of interest rate decisions continues to influence market sentiment.

Outlook for the Market:

While TRREB President Paul Baron affirms the strong demand for ownership housing, he acknowledges that uncertainty surrounding inflation and interest rates, coupled with a persistent lack of inventory, contributed to hampered home sales in June. Some real estate experts, like Cam Forbes, a broker with RE/MAX Realtron Realty Inc., believe that the Bank of Canada may be approaching the limit for interest rate increases. Forbes predicts a balanced market for the rest of the year and anticipates a slowdown in inflation, which could eventually lead to lower interest rates, benefiting the real estate market.

Can the economy absorb more rate hikes?

The Bank of Canada (BoC) is poised to raise interest rates for the second consecutive quarter-point hike, following a month of robust economic data that showcased resilient growth, a tight labor market, and persistent underlying inflation. Analysts have noted these factors as driving forces behind the decision. In June, the central bank increased the overnight rate to a 22-year high of 4.75%, breaking a five-month pause and stating that monetary policy was not sufficiently restrictive. The BoC emphasized that future rate adjustments would hinge on economic indicators.

While some recent data indicated a slight slowdown, such as a cooling inflation rate of 3.4%, a modest jobs report for May, and an unexpected trade deficit in the same month, market expectations still lean towards another rate hike. Despite facing nine interest rate hikes totaling 450 basis points since March of the previous year, the Canadian economy has displayed resilience in growth, and the housing market has shown signs of improvement. After a period of stagnation in April, the economy regained momentum in May, with a projected monthly growth of 0.4%. Additionally, data published on Friday revealed that Canada added a greater number of jobs in June than anticipated.

Jay Zhao-Murray, an FX analyst at Monex Canada, noted that although the data released after the June meeting suggested a slight cooling of the economy, the underlying details have been consistently stronger. As a result, it is expected that the BoC will raise the policy rate by 25 basis points to reach 5%. Out of the 24 economists surveyed by Reuters, 20 anticipate a quarter-point increase in rates, followed by an extended period of stability until at least 2024. While headline inflation figures are now less than half of last year’s peak of 8.1%, the three-month annualized rates of the BoC’s core measures have only marginally decreased.

While the primary objective of the BoC is to bring inflation to its 2% target, it also aims to strike a delicate balance by setting borrowing costs high enough to contain inflation without causing a severe economic downturn. Some participants in the money markets are even speculating on the possibility of another rate hike before the end of the year. Andrew Grantham, a senior economist at CIBC Capital Markets, stated that interest rates are already at, or even above, levels that would typically be seen in a normal hiking cycle. He suggests that any subsequent adjustments should focus on fine-tuning policy and responding to the most recent economic data.

The Toronto real estate market experienced a notable rebalancing in June, influenced by the Bank of Canada’s rate hikes. As sales declined and the supply of homes increased, the rapid pace of price appreciation is expected to moderate in the coming months. Affordability remains a significant challenge for buyers amidst higher interest rates. While the market shows signs of shifting towards a buyers’ market, uncertainty surrounding inflation, interest rates, and the upcoming fall season leaves the future trajectory uncertain. Overall, these developments underline the need for prospective buyers and sellers to stay informed and make well-informed decisions in this evolving real estate landscape.

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