The last few years felt like a whirlwind for most of us and media headlines always make it seem as if we are stumbling from one crisis to the next. It feels as though only yesterday the impending “health crisis” and “pandemic infection rate” were all you could read about. And although the effects of the pandemic still linger over us today, this disaster seems to be played out from a media perspective.
A new story reins: and today “Inflation” takes the lead, along with other headlines talking about market corrections, economic turmoil, and falling housing prices as interest rates rise. And it’s so easy to get caught up in the emotion of a story and lose sight of reality, so it’s worth taking a step back and looking at what’s really happening with inflation, interest rates, and housing prices in Toronto.
Firstly, a quick flash back to how we got here; March 2020, the peak of fear as the true impact of Covid was unknown and we all assumed the worst. Along with shuttered offices and lockdowns to prevent the spread of the virus, the bank dropped their key interest rate from 1.75 to 0.25 and held there for two years to support the economy and held it there for TWO years! Not until March of last year did, we finally start to see the rise back up and today the overnight rate sits at 4.5%, which is 2.5x higher than the 1.75% we had been cruising at pre-pandemic.
And given that a large portion of many home buyers purchases consist of debt financing, it would seem obvious that housing prices across the board would have seen an correlated jump and respective fall in prices throughout all this turmoil. And sure enough from March of 2020 until March of 2022 the average house price in the GTA rose 44%! And since that time during the period rates start to move upward, the average price has fallen… but not by as much as you might think… at the very most in some areas by 20%.
But depending on what media you subscribe to; you might have been told that there are no buyers left out there or that the market has crashed, and this just isn’t true. In fact, although prices have dipped, buyer demand has sustained. And even with a discounted purchase price, the actual cost of home ownership in Toronto certainly hasn’t dropped.
Let’s do some quick math on a potential home purchase and compare peak to trough interest rate environments to see how the real expense of home ownership has changed. And to keep it simple lets use the most common financing tool– the five year fixed mortgage.
Now let’s take a detached house that was selling for $2M at the peak of the market when rates were at rock bottom. The best five-year fixed rate I think I saw at that time was around 1.5%. And let’s assume the buyer puts down a minimum down payment of 20% plus closing costs and looks to finance the remaining $1.6M. The total monthly payment here would run about $5500/month.
Flash forward to today and assume the same $2M house is now, in our worst case scenario, $1.6M. With the same 20% downpayment, it would leave our buyer with a much lighter $1.28M mortgage to finance… sounds like a good deal right? But now we must finance the mortgage at the new five-year fixed rate of 4.5% and the carrying cost is just over $6500K/month.
Now you may have preference for one scenario over another because you have excess cash on hand to apply to the down payment, or because you believe rates are higher only temporarily; but the truth is that’s no easier to get into the Toronto housing market today, then it was during rock bottom interest rates AND that is because the overwhelming demand for housing in the GTA hasn’t changed much. The price of real estate in the GTA will continue to see an inverse relationship to interest rates as buyers’ ability to pay is negatively affected – but the want and need for housing will not wane so long as the fundamental supply-demand imbalance remains.
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