After a period of consecutive rate hikes, the Bank of Canada has decided to keep the policy rate steady at 5%, despite the 0.2% fall in GDP. However, the current state of Ontario’s real estate market is far from promising.
Let’s delve deep into the numbers and explore why this market isn’t just about interest rates.
1) A Market in Flux
Every facet of the Ontario real estate market, from home sales to new listings, has hit a rough patch. It is safe to say that the current market isn’t favouring either buyers or sellers.
Property investors are holding back from putting their money in the real estate market due to declining average selling prices. Aspiring homeowners are finding themselves in a tough spot because interest rates are high, and even though prices have dropped in big cities, most houses still cost more than a million dollars. Meanwhile, sellers are in a tight spot due to the low market demand.
To put it simply, it is a challenging scenario. But amid the gloom, there is a glimmer of hope (more details on it below!).
2) So, Is Waiting for Interest Rate Reductions a Smart Move for Real Estate Investors?
We get it, it may be tempting to play the waiting game for the interest rates to drop and things to fall in your favour. But the task of waiting for the interest rates to fall is not as easy as it seems.
The Bank of Canada has made it clear that its primary concern is controlling inflation, with targets set at under 3% in 2023 and 2% in 2024. Real estate market conditions are not their top priority. If their pursuit to bring inflation under control leads to less-than-favourable real estate market conditions, they are willing to accept that outcome.
Also, a rate reduction, considering the current situation, is not something that will happen soon. Even if a rate decrease does occur, it won’t instantly transform the market. The current rate is 5% and the Bank of Canada won’t abruptly lower it to 2% in a single announcement. They will make the change gradually and the market will take some time to shift. However, this is just one aspect of the challenge at hand.
3) Canada’s Housing Affordability Crisis and Its Impact on Investors
Canada is battling with an escalating housing affordability crisis that has been in the picture for two decades. In Canada, the average household income stands at $75,452. And only a minority, approximately 15.7% of Canadians earn more than $100,000 annually. The typical home selling price in Ontario is $859,379, but in high-demand cities like Mississauga, it surges past the million-dollar mark.
According to a study conducted by the Bank of Canada (BoC) and the Canada Mortgage and Housing Corporation (CMHC) , a 1% decrease in interest rates leads to a 2.5% increase in home prices. This means if interest rates were to drop tomorrow, it would worsen the affordability crisis by pushing home prices even higher.
Robin Cherian, CEO and Founder of The Canadian Home , points out that “Lowering interest rates may not have a significant impact on making homes more affordable for buyers in the current Canadian real estate market. It is a common belief in Canada that one should buy a home only when interest rates are low. However, sticking to this strategy often leads to buying in fiercely competitive markets. Waiting for interest rates to drop could mean acquiring a home for $900,000 when you could have bought the same property for $800,000. This especially applies to places like Niagara. Think about the situation in a vibrant real estate market like Toronto.”
4) Surging Demand and Shrinking Housing Inventory
We hope you remember this chapter from the economics textbook - “When demand exceeds supply, prices go up, and when demand falls short on supply, prices go down.”
So, when demand lags behind supply, homeowners who are looking to sell their properties find themselves with fewer cards to play and hence they delay the selling process. Thus, as more homeowners opt not to list their properties, the supply falls further short of the demand, resulting in a price increase. Going with the market data, the ongoing monthly decline in new listings strongly suggests this is the direction we are heading.
Currently, Canada is battling with its highest interest rate in decades. This along with the housing inventory shortage crisis is expected to result in a sluggish real estate market this fall.
According to experts, the national average price of residential properties is expected to remain stable for the rest of the year. Nonetheless, looking at the trends in the fall market, there could be a surge in activity during the first quarter of 2024 as buyers and sellers take advantage of decreasing prices. The shortage of housing inventory is particularly affecting Millennial and Gen Z homebuyers. A Leger survey found that over half of Gen Z (55%) and nearly half of Millennials (49%) had to change their homeownership plans due to the shortage of affordable housing.
5) Housing Market’s Downward Trend – A Buyer’s Window
In the current Ontario housing market, home prices are experiencing a downward trend. If we exclude interest rate fluctuations from our decision-making process, this presents a window of opportunity for those aspiring to become homeowners in 2023 or early 2024.
In regions such as Niagara, all property types are available in the price ranges of $600,000 to $700,000. Another noteworthy point is that the battle for homes among buyers is cooling off, giving buyers substantial bargaining power. This presents a green light in the housing market so buying a house now if financially feasible, is a wise move.
Mr. Manoj Karatha, Broker of Record of The Canadian Home states that, “Knowing what to buy and where to buy it is key to success in today’s real estate market. While the Bank of Canada’s decision to hold interest rates offers some economic stability, the main issue still remains affordability, not rate fluctuations. Interest rates, whether low or high, are temporary and beyond your control. However, the price you pay for a house is within your control. If you come across an opportunity where you could buy a property without straining your finances, I would suggest sealing the deal. If you are confident and sure about your purchasing decision, simply reach out to a realtor to get started.”
6) To Wrap It Up!
The key message that we want to convey is that while interest rates are significant in influencing your ability to buy a home, they are not the sole determining factor. Factors such as home prices, affordability challenges, property options, and their costs in different cities are equally crucial. Even if interest rates take a dive in the future, it wouldn’t matter much if other aspects are not in order. As a prospective buyer, you must concentrate on factors within your control, and interest rates do not fall into that category.