Market Byte: Latest Rate Hike Is Double-Edged Sword for GTA Home Buyers and Sellers

The Short

In the wake of the Bank of Canada’s 50-basis-point interest rate hike on December 7, thousands of people across the GTA must again be wondering how the central bank’s year-long battle with inflation will impact their plans to buy or sell homes in 2023.

The Long

The silver lining to the record-setting seventh consecutive rate increase of 2022 was the BoC’s suggestion that it may pause increases while it waits to see if this latest uptick curbs inflation. Indeed, according to a panel assembled by financial platform Finder.com, eight of the 15 economists and industry experts surveyed didn’t anticipate another rate hike at the next rate announcement in January. This marks the first time in the last 12 months that most of the panel did not anticipate a change in the central bank’s overnight rate. That said, 64 percent of them still anticipated that interest rates will continue rising later in 2023.

The bad news for homeowners with variable-rate mortgages and lines of credit, of course, is that their payments are now rising in lockstep with the new 4.25 percent benchmark rate, and will continue to climb should more upticks occur.

Whatever happens to interest rates, the near-term future of residential real estate in the GTA is largely tied to how rate fluctuations will impact households.

Higher rates can be a double-edged sword when it comes to real estate. Should they prove successful in curbing inflation, many Canadians will have more disposable income to use for a downpayment on a mortgage. But with levels of household debt nearing record highs, many others will see that income slip away in the form of interest payments.

At the same time, higher rates mean that many Canadians will qualify for smaller mortgages, yet will still have heftier mortgage payments. And last but not least, because household debt is especially high among Canadian homeowners, many will be nervous about taking on new or bigger mortgages.

All told, it comes as no surprise that 92 percent of the Finder.com panellists expected rising mortgage rates to continue to push home prices down. Meanwhile, overall GTA home sales are down 49 per cent year over year; and Strata.ca data shows condo sales specifically are down 60 percent.

Some banks are letting homeowners extend their mortgage amortizations to bring monthly payments down. After all, it's not in the banks' interest to instigate a wave of foreclosures or trigger a mass sell-off. It's unclear what kind of impact reverse amortizations might have in the long-term, especially if property values really are declining. But for now, this kind of leniency from the banks could help the real estate market avoid a crash landing.

Ultimately, we won't know the true impact of higher interest rates until well into 2023. It will take several months to see how households fare not only with higher borrowing costs, but also with relatively high prices for essentials like gas and groceries that could continue to rise.

My Two Cents

House-hunters who have been stuck on the sidelines in recent years owing to sky-high prices now have an opportunity to find deals that look pretty good when compared to the pandemic-fuelled prices of 2020 and 2021. Those with little or no debt, and have substantial savings, are in particularly positive positions.

In the end, however, I support the pithy words of Mark Twain: “Buy land; they’re not making it anymore.” If a home is right for you, and you feel comfortable with the financial terms, then don’t let the Bank of Canada push you around.