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Geoffrey Gilliver has never given up his property search, and even considered buying an abandoned church in King City to turn into his family home. The father of two has looked at all types of homes over the last couple of years, keeping an open mind in Toronto’s expensive real estate market.
Since he started his home hunt in 2019, he and has wife have rented in the Beach neighbourhood and had a couple kids all while searching for their first property. They wanted to stay in Toronto, which seemed feasible before the lockdowns, he said, but prices ran away from him when interest rates hit historic lows during the pandemic.
“We really want to have a place to settle and stay, and put the kids in school (long term),” he said. “But our options are limited.”
Now, a shift in the real estate market has put Gilliver in a tough situation. As rate cuts loom, he worries there will be more competition and higher house prices, pushing him to try and buy before the cuts come — a time crunch he’s feeling more acutely than ever as his oldest child is in the midst of kindergarten.
“I’m worried if the Bank drops rates too fast it could fire up the market,” he added, “and it will just create rocket fuel for home prices.”
Experts say there is strong indication rate cuts are likely to occur in the spring or summer, which will alleviate pressure on high mortgage interest rates but could also open the floodgates for more homebuyers and investors to enter the market, leading to soaring home prices. Potential buyers find themselves toeing the starting line, unsure of how best to time the market, with some feeling an urgency to jump in as prices plateau, while others are waiting for rate cuts to begin.
Though experts remain divided on how much further home prices will increase, many note there is already keen interest from more prospective buyers this year compared to last. There is a sense, some say, that once rates are cut, increasing demand for property will push Toronto back to a balanced market — it’s been a buyers market since September — with sales bouncing back from last year’s slump, which saw the lowest unit sales on record since 2000.
Shifting to a more balanced market
Since the new year, Cailey Heaps, CEO of Heaps Estrin Real Estate Team, has seen a notable shift in market sentiment as buyers feel prices and sales have bottomed out.
“Buyers feel that the end of lower prices is in sight and maybe want to capitalize on that,” she said. “Buyers and sellers are collectively shifting to a more balanced market.”
However, buyers aren’t rushing in with a sense of urgency, Heaps said, but are entering “trepidatiously” without feeling pressure to buy as they take a “wait-and-see” approach with interest rates.
Sellers, too, are waiting for their moment.
“When rates drop we will also see an increase of inventory as many sellers who have been on the sidelines will need to put their property on the market,” she said. “We should see activity in spring, especially if the Bank of Canada begins to cut rates in April.”
Some economists forecast that as soon as the Bank of Canada even signals rate cuts, it will increase sales and push up prices.
“We won’t see rates as low as we saw in the pandemic, so there won’t be that panic buying again,” said Philip Cross, senior fellow at the Macdonald-Laurier Institute and former chief economist at Statistics Canada. “But we’ve already seen the market stabilize after the bank indicated rates wouldn’t increase, imagine what a cut would do.”
In March 2023, when the Bank of Canada said rate hikes would pause there was a surge of sales during the spring market, which saw a flurry of activity and a boost in home prices. When rate hikes resumed in June and July, market activity dampened, indicating how sensitive the market is to not just rate hikes and cuts, but also pauses, Cross added.
According to the Canadian Real Estate Association (CREA), sales were up five per cent in December 2023 compared to December 2022, indicating the market is bracing for rate cuts, he said. However, the last thing the bank wants to do is fuel an upturn in the housing market, which could push inflation up again, especially after December’s inflation numbers edged up to 3.4 per cent from November’s 3.1 per cent.
“The inflation news was disappointing and the markets are starting to pull back,” Cross added. “I wouldn’t be surprised if there was just one rate cut, because there isn’t a big window for the central banks.”
After August, the U.S. Federal Reserve is unlikely to raise rates due to the presidential election, he said, meaning there will be less time to cut rates, especially if the Bank of Canada decides to start in the summer, not spring. Typically, the Bank of Canada follows the lead of the U.S. Federal Reserve, as the U.S. is Canada’s biggest trading partner. If the U.S. manages to get inflation under control with its restrictive monetary policy, but Canada doesn’t, trading becomes more expensive with its southern neighbour.
If Canada’s central bank only cuts rates once or twice, resulting in a 50-basis-point drop, the change to people’s mortgage is negligible, Cross said, but it influences the psychology of first-time homebuyers who have been impacted the most over the last few years.
First-time homebuyers left in the lurch
Since the rate increases began in March 2022, the biggest cohort of missing buyers has been first-time homebuyers, said Phil Soper, CEO of Royal LePage. They’re typically 25 to 40 years old and have seen home prices soar for much of their adult lives.
“There is now an exceedingly rare window where home prices have been flat or declining a little for an extended period of time,” he said. Home prices have fallen by almost 20 per cent since the February 2022 peak in Toronto. “The first sign of a change in home values will come from increased activity — more people will shop around when they see an end to sagging home prices.”
But Toronto home prices are still almost 30 per cent above 2019 levels and interest rates are elevated compared to before the pandemic, meaning affordability is “much worse today,” preventing first-time homebuyers from entering the market, said David Rosenberg, founder and president of Rosenberg Research and Associates, an economic research firm.
“We have a situation on our hands where the affordability ratio is 50 per cent more stretched today than the historical norm,” he said. “There needs to be a 30 per cent surge in income, or a 30 per cent pullback in average home prices to get to more normal affordability measures.”
Interest rates need to decline by more than 150 basis points to help the affordability ratio, he added — that would mean changing the overnight lending rate from 5 per cent to less than 3.5 per cent.
Canadian households are also highly leveraged — the debt-to-income ratio sits at a near record of 173 per cent — resulting in tighter lending practices from banks.
“The year-over-year trend in mortgage lending is 3.5 per cent,” Rosenberg said, meaning there has only been a slight increase in the number mortgages granted. “That’s flat in volume terms, because this time last year it was an excess of nine per cent.”
First-time homebuyers end up feeling the brunt of these changes, experts say, as qualifying for a mortgage becomes harder, which has been a challenge for Gilliver and his family.
He’s waiting for his second round of pre-approvals for a mortgage — he first qualified at $550,000 plus a 20 per cent downpayment minimum — but he’s hoping he can get a higher number the second time.
“That initial pre-approval was limiting for home buying in Toronto,” he said. “I’m trying out different levers to see what I can do to improve my pre-approval [amount], with RRSP contributions and things like that.” His first pre-approval lapsed after they saw half a dozen homes that all needed significant work — some had mould issues and others were falling apart.
“We’re willing to go to Aurora or Newmarket, and look further outside of the city,” Gilliver said. “We’ll see what we can get with this second round of pre-approvals.”
To buy or not to buy?
“This segment of buyers were caught off guard by the Bank of Canada’s quick rate hikes,” she said. “They’re going to need a little more data before jumping back in.” That should come as some relief for first-time buyers, as the frothiness during the real estate feeding frenzy during the pandemic caused by speculators likely won’t return this year, she added.
As more first-time homebuyers are priced out of the market, there are still some looking to buy this year, keenly watching market dynamics. Anthony DeStefano, a realtor based in Toronto, is hoping to buy his first property in the city after the Bank of Canada cuts rates. Unlike Gilliver, he’d prefer to pay a mortgage with lower interest rates even if prices edge up “a little.”
“It’s trying to strike the right balance between home prices and interest rates,” he said. “If the bank cuts rates by 100 basis points that would really solidify my position.”
Currently, DeStefano sees opportunity arising through distressed sellers with power of sale in locations where home prices have already dropped. And because Toronto is a buyers’ market right now, potential purchasers are able to include more conditions — such as home inspections and price reductions — and negotiate if the they feel the home is priced too high.
“I just managed to help a client save $170,000 on their recent purchase,” DeStefano said. “Buyers have a lot of leverage right now.”
But even though the market has tipped in favour of buyers, it’s still a tough market for entry-level buyers.
For Gilliver, most of the homes he’s seen have been fixer-uppers or “gut jobs” where the entire home needs to be renovated. It can be discouraging, because even though his family has saved substantially for their first home, they now have to factor in renovation costs to their savings. While the once-church in King City had good bones, he said, it needed too much work.
“It’s frustrating because as soon as the market is doing better it still feels unattainable.”