The Toronto real estate market is changing, and prices are going down. The downward pressure on prices directly correlates to rising interest rates. The government and the banks are raising interest rates to curb inflation. Rising interest rates are reasonable because they help keep the price of goods and services (and houses) in check.
What most people say to me when they talk about the changing market “The price changes are good, but I feel so badly for people who bought at the beginning of the year.” Here’s what they mean by that and why there’s no reason to feel pity for those buyers.
What they mean: In west Toronto and most other areas in the city, prices are at the same level as they were in October/November 2021. Prices went up by 10-15% at the beginning of 2022 when there was a lot of activity in anticipation of the looming interest rate hikes. Therefore, if you bought your house from January to March 2022, there’s a reasonable chance that, on paper, your home has lost some of its value. This is not something that Toronto buyers are used to, and, therefore, it’s causing some concern.
Thinking about selling your home soon? Given new market trends, you may need to adjust your approach. Learn more here.
The Low-Interest Advantage
Why we shouldn’t pity them: Due to rising interest rates, people who bought houses at the peak of the market this year will pay less for their homes. That’s it. The math is in their favour. Take this scenario:
Buyer A purchases a house in February 2022 with a mortgage of 1 million dollars at 2% interest. Amortized over 25 years, the monthly payment is $4,234.42.
Buyer B buys an identical house for 15% less than buyer A in June 2022 and has a much smaller mortgage of $850,000. However, even though her mortgage is smaller than buyer A’s, her monthly payments are $5109.44, an extra $875/ month. Buyer B is paying more money per month to the bank, but less is going to her principal than to Buyer A. So when Buyer A refinances in five years at a higher interest rate, their mortgage will be much lower because they’ve had five years of paying down more principal.
The only way that Buyer A will lose money is if they need to sell their house in the next twelve months. However, there are so many extra costs associated with buying and selling real estate, such as land transfer tax, real estate commissions, moving costs etc., that it often doesn’t pay to sell your house within a year after you purchase it, even if the market goes up.
The Market is Healthy
The market is not crashing. This is important, so I’ll repeat it the market is not crashing. A market crash happens when people owe the bank more than their house is worth. Canada has strong guidelines around how much equity needs to be in a property before they approve a mortgage, so it is unlikely that this will happen.
★ Real Estate in Toronto is shifting and you could be impacted by new market trends. Explore these posts to learn more.
- Is the Toronto Real Estate Market Now a Buyer’s Market?
- When and How Should You Buy a House in West Toronto
- Is the Real Estate Market Crashing? 2022 Edition
A Net Positive
Buyers who purchased houses in February/ March with low-interest rates are still further ahead than buyers who purchase lower-priced homes at a higher interest rate. If you bought at the peak of the market, take a deep breath because you’re going to be just fine.
If you still need to purchase and are worried about the high-interest rates, lower your budget to focus on the monthly payments. This is a buyer’s market, and there are a lot of opportunities for buyers to get good deals on houses right now; just make sure the monthly budgets work and be conservative with your offer price. You’ll likely still be able to buy a great place!
Even in a buyer’s market, finding the right home requires working with the right real estate agent. Find out what makes a great buyer agent here.
Robyn VanderVennen
The Kim Kehoe Team
