Rate hikes add a note of hesitation to real estate market

The Toronto-area fall real estate market is entering the final stretch of 2022 with dispirited buyers, a lack of inventory and the table set for an interest rate hike in December.

The cautious mood in November follows a sombre October which saw sales in the Greater Toronto Area tumble 49.1 per cent compared with October, 2021, according to the Toronto Regional Real Estate Board.

The average price in the GTA dipped 5.7 per cent from a year earlier to stand at $1.089-million at the end of October.

Rochelle DeClute, broker at DeClute Real Estate Union Realty, says rising interest rates have offset the drop in average price. House hunters who line up a preapproved mortgage and fail to buy before it expires find out they are approved for less each time they apply for a renewal.

“They’re preapproved for a certain price and that price keeps dropping,” she says. “That’s been discouraging.”

Meanwhile, the family money that propelled many first-time and move-up buyers during the run-up in prices during the pandemic is not as readily available,” Ms. DeClute says.

Older generations have seen their investment portfolios decline, she says, and higher interest rates make it less attractive for parents to take out a home equity line of credit on their own house in order to help their adult children.

While such a move made sense when rates were low and real estate prices were rocketing higher, parents are more hesitant when prices are declining, she says.

With prices softening, Ms. DeClute says her team is making sure that sellers are serious before they take on a listing.

Prepping houses for sale is costly for agents, who invest in staging with fresh furniture, painting and landscaping in some cases.

“We really have to have a good conversation about their motivation,” she says. “We have to be very sure that they’re ready to sell and they’re not just testing the market.”

Some homeowners see a property in their neighbourhood sell quickly and expect the same result, she says. If their own house lingers, it’s hard for homeowners not to take it personally.

“The reality of living through it is something sellers are not prepared for,” she says.

Still, some houses are selling with multiple offers – particularly if they have an asking price below the $1-million mark.

Ms. DeClute points to one recent sale in Toronto’s east end. Agent Melanie Wright listed the semi-detached house at 36 Ashland Ave. with an asking price of $999,000 and drew 20 offers.

Six of the offers were clustered around the high end, says Ms. DeClute, and the house sold for $1.415-million.

Houses in higher price brackets are also selling, but a little more slowly compared with recent years, Ms. DeClute says.

In the Scarborough Bluffs, agent Rick DeClute listed a large house at 53 Lynndale Rd. with an asking price of $4.2-million. The house sold after 16 days on market for $3.9-million.

The average number of days on market in October was 21, up 61.5 per cent from the 13 in the same month last year.

New listings, meanwhile, dropped 11.6 per cent in October from October of last year.

Traditionally, many homeowners have taken advantage of a declining market to trade up.

But agents say some potential move-up buyers appear to be nervous about taking on more debt after a series of interest rate hikes by the Bank of Canada that lifted its key rate to 3.75 per cent.

Pritesh Parekh, real estate agent with Century 21 Legacy Ltd., says he is encouraging prospective buyers to figure out the repercussions for their budget if mortgage rates climb higher or they face economic hard times.

“They should be asking the questions I don’t think people were asking two years ago,” says Mr. Parekh, who has a background in finance. “As much as the stress test helps, do your own stress test.”

Mr. Parekh says buyers are also delving into the fine print in mortgage agreements more thoroughly than they did in the past. Breaking a fixed-term mortgage, for example, often comes with hefty penalties.

He expects the market to remain slow for the remainder of 2022.

But some clients are contemplating an upgrade in 2023 as the decline in the average price in the GTA hits single-family homes the hardest.

But a continuing trend that partly accounts for the tight inventory and the low number of transactions at the moment is that people often want to hold onto the original property.

He points to one client who was living in a condo unit with his family. He purchased a townhouse for the family and kept the condo as a rental property.

Mr. Parekh says owners who sell now will have to accept a lower price for their current property, but in most cases they will save more on the new property. He points to the October numbers from TRREB, which show the average price of a detached house in the GTA dropped 11 per cent year-over-year to stand at $1,372,438. For a semi-detached, the average price fell 6.2 per cent to $1,079,393.

The average townhouse price in the GTA slipped 3.9 per cent year-over-year to $919,903.

The average condo price, meanwhile, edged up 1.8 per cent to stand at $716,515.

Mr. Parekh predicts the market will soon head into its typical seasonal slowdown in December, and the Bank of Canada has another policy meeting set for Dec. 7.

“As we get closer to the end of the year, there’s the looming story of another rate hike.”

Stephen Brown, senior Canada economist at Capital Economics, notes the central bank has been sounding more dovish recently but he believes that tilt looks premature following a surge in employment and acceleration in wage growth in October.

Mr. Brown points out that Bank of Canada governor Tiff Macklem left the door open to another 50 basis point hike in December, but many on Bay Street are now forecasting 25 basis point hike.

Mr. Brown expects the bank to hike in December and again in January.

Looking ahead, Ms. DeClute expects transactions to slow down even more in the final weeks of the year.

More homeowners are planning to list in the early months of 2023 but some are hoping prices will rebound in the spring. Ms. DeClute sees that as unlikely.

The impact of higher interest rates tends to hit borrowers about 12 to 18 months after rates begin to rise, Ms. DeClute says, so she is just now receiving the first calls from concerned homeowners.

One buyer who purchased during the pandemic planned to hold onto the house for about five years and then use the profits from a sale to fund his retirement. But the increase in rates has made that plan unviable.

“He felt strongly the market is going to continue to decline and he wants out.”

She is also hearing from families who have tighter cash flow than they had when they bought their house. Some have kids in expensive activities such as hockey and dance and they will have trouble stretching to make mortgage payments at higher rates.

Ms. DeClute says some are running the numbers and deciding to simplify their lives.

“They’re saying, ‘I don’t need to be in this pocket’, or ‘I don’t need this huge house.’”

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