One of the problems with doing what I do and spending time with the people I spend time with is that pretty much all I ever seem to talk about is real estate. Prices. Market slowdowns and rebalancing. Bank of Canada rate hikes. Doom and gloom, optimism and exuberance. Even by real estate-obsessed Toronto standards, it’s a bit much.
So I must admit that it came as a complete shock to me last week when I ran into some old friends who revealed themselves to be completely oblivious to what feels to me like a seismic shift underway in our market. It felt like all anyone was talking about was the interest rate hike yet there they stood before me with zero clue.
It reminded me of a tweet I read recently that said that the vast majority of Canadians will not begin to engage with the current reality of steadily-increasing borrowing costs until it comes time for their mortgage to renew. Likewise for the vast majority of people living in their homes, happily going about their daily lives. For many, in spite of all of the press coverage, any talk of a housing correction has yet to actually permeate in any meaningful way.
Echo chamber notwithstanding, this was a big week and on Wednesday it seemed that pretty much everyone everywhere was talking about the Bank of Canada’s shocking-but-not-really-surprising one per cent hike to their policy interest rate. And so, for those busy enjoying their summer and not paying much attention, here’s a little primer on what’s happening.
After years of rising prices with a run-up through COVID that defied all expectations, the Toronto Regional Real Estate Board’s June market data revealed our first year-over-year decline since the pandemic began. Canada-wide prices have fallen 18.4% and we are looking at our largest month-over-month decline in the national benchmark index price since the index began in 2005. This is significant.
Of course, this sudden shift in buyer sentiment and activity is almost entirely attributable to the current state of our economy with inflation back to ‘80s levels, a recession looming on the horizon, and interest rates with nowhere to go but up.
But even with the broad consensus that rates would rise, this week’s announcement by the Bank of Canada that they would raise their benchmark interest rate by a full percentage point came as a surprise. After months upon months — years even — of dragging their feet as markets exploded and inflation settled in, few expected that they would suddenly move forcefully towards the biggest rate hike by the central bank since 1998. For the first time, a variable rate mortgage is now higher than it was pre-Covid. And lest one think that this is one and done, a similarly aggressive hike is all but guaranteed for September.
And yes, I know that rates were double-digit in the ’80s so some of you will say that this should be a relative walk in the park. I also know that back then the average home cost about the same as the current average down payment. And wages? Not far off where they currently stand today. It’s apples to oranges. And it’s not good.
Meanwhile, the rental market is positively on fire, with rents skyrocketing back to pre-Covid levels and beyond. Competition is so fierce that would-be tenants are now getting into bidding wars, frequently having to offer above-ask to edge out the competition. The latest move is to volunteer to prepay the year in advance. One can only imagine how this this shakes out to impact average Canadians who may have emerged from two years of rolling lockdowns and job interruptions without savings and less than stellar credit.
In spite of speculative activity positively ripping during the low-rate run, we still haven’t anything close to sufficient rental housing. Sure, we’re witnessing the slowdown of the demand cycle, but supply is hugely inadequate.
Housing affordability and supply should remain front and centre in the months ahead, even as the real estate market quiets down. Because for every condo project that gets shelved for the time being as the market grapples with new financing and construction costs and viability becomes uncertain, the fundamental truth exists that we are falling short of producing adequate supply for current demand levels. Add-in Canada’s bold immigration targets and we have a problem. It’s time that governments at all levels step up to ensure that purpose-built rental housing gets funded and fast-tracked. We cannot afford them to dither about talking about one-time inflation relief cheques when the real work should be obvious.
Ten years from now university economics classes will study the confluence of government ineptitude that, in fact, hurtled us towards this moment. One can only hope that this week’s move by the Bank of Canada signals a recognition that it’s time to get serious.
On Twitter: @brynnlackie
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