Will Rising Interest Rates Affect Toronto’s Housing Market?

2020 and 2021 were record-breaking years for the Canadian housing market. Home sales in 2021 reached 667,000 units, shattering the previous record by 21%. After a whirlwind two years of pandemic-induced selling and buying, experts predict that the Toronto housing market could begin to cool. 

One major factor in the potential cooldown is a rapid rise in interest rates. Hopeful homebuyers will have to navigate rising mortgage rates in the coming year. According to RBC economist Robert Hogue, the Bank of Canada’s significant interest rate hikes in 2022 “will be a game-changer for the market.” Many Canadians are eager to find a home, but rising interest rates will decrease their homebuying budgets.

According to Mortgage Sandbox, five-year fixed rates are currently in the 4% range, and five-year variable rates are in the 2% range. Robert Hogue writes that fixed mortgage rates are “quickly returning to pre-pandemic levels”, and the Bank of Canada’s hiking campaign will soon affect variable rates as well. Fixed rates have already risen between 1% and 1.5% from the record-low pandemic rates. 

Rising interest rates will influence some markets more than others. According to RBC’s latest monthly update, lower-priced markets, such as Atlantic Canada and the Prairies, are less sensitive to rising rates. In Toronto, one of Canada's most expensive markets, buyers will be most affected. 

April 2022 statistics from the Canadian Real Estate Association (CREA) suggest the beginning of a cooling period for Canada’s housing market. National home sales dropped 12.6% between March and April. This decline represents the lowest monthly activity in almost two years. Jill Oudil, chair of CREA, points to the rise in interest rates and buyer fatigue as reasons for the slowdown.

In the past decade, affording a down payment was the biggest financial obstacle for many homebuyers. Now, however, down payments are just one of several hurdles that prospective buyers will have to face. Rising interest rates present a significant new challenge. Between October and April of 2022, “the monthly payment for a new mortgage on a typical home in Canada increased by nearly $800 a month”, Ben Rabidoux, founder of research firm North Cove Advisors, told the Globe and Mail. 

The combination of interest rate increases and record-high home prices puts buyers in a difficult situation. Housing affordability is “spiraling to worrisome levels”, according to RBC’s March 2022 Housing Affordability Report. Although the pandemic certainly sent things into overdrive, house prices in Canada have been rising steadily over the past two decades, resulting in a 375% nationwide increase. 

High house prices are discouraging for some buyers, but there are still ways to achieve their homeownership goals. Buyers may have to tweak their preferences, such as considering more affordable areas, looking for a more modest space, or opting for mortgages with lower rates. As pandemic restrictions ease and living situations change, Canadians may also adjust their housing needs. 

When it comes to choosing between different mortgage rate options, Canadians will have to carefully consider their options. Frances Hinojosa, a Toronto-based mortgage broker, told the Globe and Mail that although Canadians usually prefer five-year terms, “some buyers may find a better fit in a shorter-term fixed rate, which might allow them to ride out the current spate of interest-rate increases without committing to a relatively higher rate for five years.” 

Jimmy Jean, chief economist at Desjardins, told Global News that the past two years also saw an increase in the popularity of variable rate mortgages. Jean predicts that after hearing the Bank of Canada’s plans to raise interest rates, some buyers will prefer the peace of mind of a fixed rate. However, variable rates are still a viable option for those looking for a lower alternative. Variable rates are expected to remain below 3% well into the coming year. 

Some of the forecasts may sound bleak, but rising interest rates aren’t an immediate cause to panic. According to economist Robert Hogue, “rather than pose a major threat, we think rising interest rates are likely to bring welcome changes to the market—including more sustainable activity, fewer price wars, more balanced conditions, and modest price relief for buyers. After the extreme price increases and heated bidding wars of the last year, this would be a positive shift.” 

Hogue suggests that the odds of a housing market crash are low, as Canada’s positive demographic factors will provide a “safety net”. Millennials and the growing immigrant population are key forces in the demand for housing. 

CREA forecasts that 612,800 properties will trade hands in 2022, which is a decline from 2021, but still the second-highest annual figure ever. These historically strong home sales are forecast to continue into 2023, but CREA suspects that higher prices, higher interest rates, and limited supply will further slow market activity and price growth, particularly in expensive markets. 

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