If you’ve been tuned into the news recently, you may have heard about rising interest rates.
Just over 2 years ago, the Bank of Canada (BOC) lowered its policy interest rate in an attempt to minimize economic damages caused by the COVID-19 pandemic. Then, as a result of the frequent lending brought on by these changes, inflation rates in Canada climbed to concerning new heights. Now, the BOC is working to curb this inflation by raising its policy interest rate.
These interest rate hikes will make lending more expensive for financial institutions, who will then pass these costs onto Canadians.
So how do these changes affect Torontonians who are looking to buy or sell their home? Let’s take a closer look.
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How Much Did Interest Rates Increase?
In March of this year, the BOC’s policy interest rate grew from 0.25% to 0.50%. Not long after in April, the policy rate once again doubled, reaching 1.0%. Now, as of July 1st, the BOC has increased their rate again, to 2.5%.
A climb from 0.25% to 2.5% may seem drastic. However, it’s important to put things into perspective. Just prior to the COVID-19 pandemic, the BOC’s policy rate was 1.75%. So while rates seem to be climbing dramatically, in reality, it’s more like a return to normal.
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Pandemic Market Overview
When interest rates first dropped, it became much more affordable for everyday Canadians to borrow money. This, along with other pandemic-related factors caused the number of buyers in the market to skyrocket.
With more buyers and an already low level of inventory, housing in Ontario quickly became an extremely competitive seller’s market. This led to record high selling prices, frequent bidding wars, and even conditionless offers. So while it did become easier for buyers to obtain a low-rate mortgage, successfully purchasing a home was a whole different story. Today, the BOC’s new rates are an effort to limit those challenges.
How Will These Increases Impact Home Buyers Today?
While the interest rate increases are still fairly new, many economists and real estate experts have similar expectations about their market impact. Overall, the effects of these changes will likely be quite subtle. However, we could see more definite trends appear down the line.
Most notably, these higher interest rates will make it harder for Canadians to afford a mortgage. This is especially true compared to the early months of the pandemic. As a result, fewer buyers will enter the market. This means that the housing in areas such as Toronto will become less competitive for those who are able to secure the financial resources.
With this in mind, experts anticipate housing in the Greater Toronto Area will begin to balance out. Fewer buyers will likely mean that average home prices no longer climb at the same rate they did during the pandemic. In some markets, they may even decrease.
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Less Buyer Competition
With these buyers on the market, Canadians who are actively searching for a home may have an easier time than they would have in 2020 or 2021. Beyond stabilizing prices, the offer process is also trending to become less aggressive. Less competition among buyers means that bidding wars – a common phenomenon of the last two years, should become less frequent. This will allow buyers to have more time when making an offer and can reduce extra stress in an already stressful process.
With less aggressive buyers, homes will also likely spend more time on the market. During the pandemic, homes sold at both record prices and record speeds. However, as the market cools, lingering inventory will relieve some of the pressure facing buyers. As a result, most homes will spend longer on the market.
Buyers who were able to afford a home before the pandemic should have no trouble in today’s market. That being said, as demand for housing in Toronto stays high, a small increase in inventory is unlikely to drastically lower selling prices. However, as homes take longer to sell, there may be more options available for buyers in the market.
With new developments in Canada’s lending market, buying a home successfully requires working with an experienced agent. We can help. Contact us.
