Despite mortgage squeeze, rising rates likely won’t slow Toronto home prices

The latest Bank of Canada interest rate hike will add to the financial burden of some variable mortgage holders and those renewing fixed rate loans this year.

But Wednesday’s quarter-point increase isn’t likely to slow home price recovery in the GTA, say real estate experts.

They say that the lack of homes listed for sale in the Toronto area will continue to buoy prices for the foreseeable future.

“Even if you saw sales flatline, you were still talking about listings well below where they were last year so market conditions would still be tighter than they were this time last year and that supports further price growth,” said Jason Mercer, chief market analyst for the Toronto Regional Real Estate Board (TRREB).

Buyers who stepped out of the market when the central bank started hiking historically low rates in March 2022 have been active again in recent months. Toronto area home prices are still down on a year-over-year basis from the February 2022 peak average of $1.33 million but they have been edging up monthly.

May was the fourth consecutive month in which the average selling price of a home rose in the region, up to nearly $1.2 million, only 1.2 per cent behind the same month last year.

Home buyers have adjusted to the higher rates of the last year and aren’t likely to step back again because of an additional quarter-point on their mortgage, said Mercer. Even before the first of the last nine rate rises, the mortgage stress test required home buyers to qualify for a loan at a higher rate than their bank actually charges.

Wednesday’s announcement puts the central banks’s key lending rate at 4.75 per cent — the highest since April 2001. The bank’s increase is an attempt to tame inflation that is resisting their two per cent target.

Although higher borrowing costs lead to inflation in mortgage and rent prices, “over time that’s way more than offset by its impact on consumer spending in other sectors,” said Mercer.

Royal LePage CEO Phil Soper expects his company will hike its year-end price forecast upward for a second time this year, despite higher mortgage rates. The price correction triggered by last March’s rising rates, was over at the end of the first quarter of this year, he said.

The picture could change if rising rates appear to be a trend again, he said. If people who could move decide against it because they’re worried about a big transaction in the midst of economic turmoil that might cool demand somewhat.

“If what policymakers were hoping for was a direct drop in home prices, I just don’t see it happening,” said Soper, “The imbalance between the people who need to put a roof over their heads is just still so great.” He pointed to record high immigration levels and consumers who have been renting and saving to buy as price drivers.

Interest rates, he added, will gradually put upward pressure on rents as landlords renew their mortgages or purchase new property.

While listings continue to languish in many parts of the GTA, Ara Mamourian, managing partner with The Spring Team, REAL Broker Ltd., says the number of homes going to market has been increasing in the last five weeks downtown and in urban areas like Leslieville and Roncesvalles.

But he expects Wednesday’s rate hike could start the summer slowdown a little early — although that might not be a bad thing.

“The listings are increasing now and if sales actually decrease as a result of this rate hike, the market will move back into a more balanced place where sellers aren’t necessarily in the driver’s seat all the time but buyers aren’t either.”

People assume buyers will be immediately impacted by a rate rise, he added, but anybody who is actively in the market has a pre-approval locked in.

There will be pain in some quarters, however, said Ron Butler of Butler Mortgage. Some variable mortgage holders will hit the trigger where the interest portion of their loan surpasses the total mortgage payment, often pushing them into longer amortization periods.

For those with fixed rate loans renewing this year, Wednesday’s interest rate increase “is a real blow,” because, after falling March through May, those rates have been rising again and the central bank’s announcement means all chances of rate cuts this year have vanished, he said.

“Some of the better options in the 4 per cent range that existed just three or four weeks ago are gone. It’s going to be nothing but rates that start with a five or possibly even rates that start with a six,” said Butler.

James Laird, co-chief executive of rates comparison site Ratehub.ca, estimates a homeowner who had a 10 per cent down payment on a $716,083 home with a five-year variable rate of 5.55 per cent amortized over 25 years has a monthly mortgage payment of $4,075.

With the 25-basis point rate increase, that will increase to 5.80 per cent and their monthly payment will increase to $4,173. This means that the homeowner will pay $98 more a month or $1,176 a year on their mortgage payments, he said in a press release.

For those who have fixed payments on a variable rate mortgage, he predicts they will exceed their trigger rate if they haven’t already — the point where your payments are no longer enough to cover all of the interest you’ve accrued since your last payment. This means your entire mortgage payment is covering interest, so none of it is allocated toward principal.