Will Toronto House Prices Drop?

Bank of Canada has, so far, increased the benchmark rate 3.5% since Feb. 2022. Toronto house prices have dropped since then.

I discuss what has happened in Toronto's real estate market, what's happening and what will happen based on 3 indicators I'm tracking.

Let’s briefly look at what has happened before we look to what could happen in Toronto’s real estate market. 

Earlier in 2022, Jan & Feb, it was wise to buy first then sell due to strong competition, multiple and bully offers. Whoever bought then and the market shifted early March, had to take a hit on the selling price since they had to close on the purchase of the new home at a favourable interest rate. I believe that reflected in the big drop in average Toronto house prices. In Feb. 2022, average detached in the city of Toronto sold for $2.073 million. In July 2022, the average detached in the city of Toronto sold for $1.515 million. Since then the average detached has hovered between the $1.5-$1.6 million. Whoever bought in February, had to get their house ready for sale, put it on the market, sell in March and close on the sale in 90-120 days putting the closing date in the June-July timeframe which is where we see the biggest drop since the peak of February.

Let’s look at the current market conditions.  Sellers, some not all, have accepted the market reality and understand January and February prices are long gone. This explains why there is a drop in number of homes for sale coming onto the market. If a homeowner doesn’t need to sell, they’ll stay in the home and ride out the market till it bounces back. On the demand side of the real estate market, buyers are being pushed out . At the time of publishing this post, a homebuyer would have to qualify at over 7.5% mortgage stress test.

There are 3 indicators I’m looking at to see when the real estate market will bounce back.

1. Inflation: This is a tricky one for the Bank of Canada since their benchmark rate hikes take 12-18 months to filter through the economy. Although they are looking at current data, they make decisions based on where inflation will be in about a year and a half. 

2. Exchange rate: The US has exported its inflation problem. As the US dollar gains strength, Canadian inflation will be high since imports are bought in US dollar. I’m keeping an eye on the US Federal Reserve, as they increase their benchmark rate, the US dollar gains strength against other currencies. Once the US Federal reserve indicates the end of their benchmark rate, that will be the indicator to look for where we will know we are the peak of interest rates.

3. Unemployment: Bank of Canada will continue to increase its benchmark rate to slow down wage inflation due to labour shortage through higher unemployment. At the time of publishing this post, Canada’s unemployment is at 5.2% and until that figure is the 6% range, the Bank of Canada has room to increase the benchmark rate. 

I believe the real estate market will continue to be flat till the above 3 indicators settle down and we have reached some sense of stability, until then Toronto’s real estate market will be floating along, nothing too exciting.

This market presents opportunities for real estate investors with skyrocketing rents and higher mortgage stress tests pushing potential buyers into the rental market as well as move up buyers who can take advantage of little to no competition in upsizing their homes.

Until next time happy home hunting!!