Higher rates, inflation bite into Canada's scorching-hot housing market

Realtors say drastic changes in mortgage rates are putting a chill on metropolitan markets

Higher rates, inflation bite into Canada's scorching-hot housing market

After seeing explosive price growth over the previous two years, suburbs and towns close to major metropolitan areas could be set for a slowdown in property demand, according to some real estate and mortgage professionals.

According to Reuters, properties advertised for sale in Toronto’s supply-constrained market have already decreased at a slower rate than sales in February from a year ago. That’s compared to the most of last year, when listings lagged sales.

"I had listings that, in January, would have had a 100+ showings," Nasma Ali, chief executive of broker One Group, told the news outlet. "All of a sudden, we're only getting five to six in four days. This is a transition period and it's not for all markets or price points. But we're seeing it."

A conjunction of variables appears to be driving the slowdown in large cities such as Toronto and Vancouver, as well as their surrounding territories. Sentiment is shifting as a result of inflation stoked by Russia's invasion of Ukraine, deteriorating housing affordability, and rising fixed and variable mortgage rates.

Home prices in Canada have risen 52% in the last two years, according to Reuters, thanks in part to record-low mortgage rates. However, demand is cooling as fixed mortgage rates rise alongside rising bond returns, and variable rates rise following the Bank of Canada's first boost in three years.

According to BOCWATCH, money markets expect the central bank to raise its policy rate from 0.5% to 2.25% by the end of the year.

"This is the most dramatic increase in five-year fixed rates that I can remember, and I've been in this business for two decades,” David Larock, a mortgage agent at Integrated Mortgage Planners, said to Reuters. “I'm starting to see purchase and sale agreements come in with financing conditions, which has been unheard of in the last couple of years.”

Marnie Bennett, owner of Bennett Property Shop Realty in Ottawa, has also noticed a shift in the market, according to Reuters. The change was particularly noticeable at the lower end, as affordability worries deter first-time buyers and investors cash out when the market peaks.

"It's only because interest rates are so low that there's any affordability left," said BMO Capital Markets Senior Economist Sal Guatieri.

"But that affordability will erode pretty quickly," he added, referring to the central bank's rate hikes that "will douse the flames somewhat."

Despite the weakening activity, prices in Toronto and Vancouver have increased by 27% and 20%, respectively, from a year earlier. Prices are up 20.6% on average across the country.

"It's still a seller's market," said Toronto realtor Lisa Bednarski at BSpoke Realty. "But what we're going to stop seeing are the homes that sell for inexplicable amounts above their market values."