For months, real estate experts and economists debated the impact of the first Bank of Canada interest rate cut, with a large camp thinking buyers would return to the market as they did following last spring’s two-month rate pause. If a pause in rate hikes could spur such activity, imagine the impact of a rate cut, experts warned.
But two weeks after the Bank of Canada cut the key overnight rate by 0.25 percentage points, the drop seems to have had little effect.
“There’s a listing for a detached home near Avenue Road and the 401, in an amazing neighbourhood and priced competitively,” said Sean Mayers, a realtor with Century 21 Regal Realty brokerage, based in Toronto. “There’s been showings, but there’s little activity in terms of offers from buyers. They want to see another rate drop, and sellers are sitting on the sidelines waiting for more buyers to enter the market.”
Post-rate cut, Toronto’s real estate market is at a standstill, experts say, as affordability is stretched to near record high, hindering first-time homebuyers from entering the market. Sellers, hoping the rate cut would spur a run up in prices, continue to stubbornly price their homes above market value.
In May, sales were down 22 per cent year over year, a trend that will likely remain through out the year unless there are more significant rate cuts down the road, said John Lusink, president of Right at Home Realty.
“Incoming transactions are flat and listings have dramatically increased,” said Lusink. “The supply increase is strong, but there’s no movement on the sales side. That may change if there’s another rate cut in July.”
Industry insiders say anticipation is now building on the Bank of Canada’s next move, as economists forecast one or two more rate cuts by the end of the year. If a rate cut is announced in July, they say even if it’s just another 0.25-percentage-point decrease, it will give buyers and sellers more confidence that the rate cut cycle will be faster than anticipated.
‘Rates are still too high’
”(Interest) rates are still too high to result in a rally,” said John Pasalis, president of real estate brokerage Realosophy. The 0.25-percentage-point decrease was too small a reduction to have much impact on the market, he added.
“Most people weren’t expecting this reversal from just a quarter point,” he said. “The market will be sluggish this year.”
That’s a shift from last year when, after eight rate hikes, the central bank held rates in March and April. The effect was a rush of buyers and a reversal of declining prices.
But since resuming hikes in June and July and levelling off the rest of 2023 and first half of 2024, housing has become more unaffordable, reaching near record levels, said Lusink. The Bank of Canada’s housing affordability index is at its highest since the 1990s when a real estate market crash hindered first-time homebuyers from entering the market.
Detached faring better than Condos
However, some realtors are seeing a shift in consumer mindset post-rate cut, especially with lowrise housing, as select Toronto neighbourhoods are seeing a higher volume of transactions, said Cailey Heaps, CEO of the Heaps Estrin Real Estate Team.
“Leaside has done exceptionally well from significant demand and low inventory creating the perfect storm,” she said. “Lawrence Park has also done well.”
There are pockets in the city where activity is present due to buyers looking for semi-detached or detached homes who already have some equity to leverage themselves into a bigger family home.
But the condo market remains quiet.
Sales have continued to trend downward even after the rate cut, said Pasalis, and listings have increased, showing no improvement in the condo sector in June.
“Every week that passes there’s more listings in the condo market,” he said. “There’s nothing to suggest the condo market will be picking up.”
‘A lot more pain to come’ in pre-construction market
Even with the rate cut, the pre-construction sector faces challenges on deals closing, indicating “a lot more pain to come,” said Lusink. It takes years for pre-construction condos to get built, with many buyers finding themselves unable to close as they struggle to qualify for a mortgage at today’s higher interest rates compared to when they bought.
While some developers have worked with buyers to help close the deal, Lusink said, some buyers have just walked away from large deposits or have put their units up for significantly reduced prices in the assignment space.
If more people continue to off-load their units for significantly lower costs it can depreciate the value of the building, which isn’t what developers or existing homeowners want, he said.
“If there’s enough of this going on it’s challenging for those who were able to close if they see the unit next to them sold for a 15 per cent discount,” he said, adding the value appreciation is at stake.
Investors still on sidelines
Currently, over-leveraged investors aren’t looking to return to the market with elevated interest rates, experts say.
Even with skyrocketing rent, in some cases it’s not enough to cover the cost of a mortgage as well as other maintenance fees. It means that investors will struggle to maintain a positive cash flow, Pasalis said.
But Heaps said there is “huge opportunity” in the condo market for investors willing to take on some risk.
“We’re seeing a lot of multiple offers for rental,” she said. “So if investors are willing to get into the market they could be rewarded long-term.”
