Bottom of The Market, Interest Rate Hike, Trigger Rates | August 2022 Market Update

Steven Ho Market Update

Are We At The Bottom of The Market?

The GTA Real estate market has had quite the ride in 2022. From historically low interest rates that caused an ultra hot seller’s market, and the 4 interest rate hikes since March and now a 5th, 0.75% increase, have really raised the cost of borrowing to the point of bringing the real estate market back down to earth but still quite unaffordable.

From 0.25% and now we’re here, 3.25%. Dropping sales and average price month over month…until now. August, for the first time since the start of interest rate hikes in March, has seen an uptick in activity and average price. GTA Sales activity is still down 34.2% compared to last August but price is up by 0.9%.

It’s not huge, but have we seen the bottom of the market? Mississauga sales are down 40.5% but price is up 11.9% from last August.

What stands out to me the most is the price changes in the different housing segments. Condos and Townhomes are leading the way in price growth, 5.7% and 10.6% respectively, and Semis and Detached homes are trailing behind -3.7% and 2.6% respectively. This is why it’s optimal to UPSIZE in a DOWN market.

Interest Rate Hike

The BOC says they aren’t finished yet.  The next announcement is October 26th, depending on how inflation reacts to this increase. We’ll see what they do.

When it comes to Real estate, what these increases have done and are intending to do is increase the cost of borrowing to slow down buying. It’s doing its job, it has reduced buyers’ budgets. Some buyers are now tenants, but some buyers are still buying, just smaller properties. This has really been the driving force of this housing correction as we saw unsustainable growth over the last 2 years with low interest rates.

The market has changed quite a bit over the last 5 years. Whether it was government rule changes or covid lockdowns, it shocks the market and once things calm down, people figure out how to move forward and plan their next move.

But with each interest rate increase, the market will take some time to adjust and continue. It just seems like we’ve been getting an interest rate increase every month…

When the cost of borrowing is expensive, people have a choice to make. Buyers’ budgets are smaller, so they buy smaller. Their budget is now too low for them to get anything, so they rent or stay where they are and don’t make a move.

The 3 fundamentals that affect the real estate market are interest rates, unemployment rate and immigration.

Interest rates are climbing, and this determines affordability, what your budget is and what you can buy.

Immigration is crucial to watch in Canada because that directly affects the demand for housing, which we are currently experiencing historical immigration coming in. Demand will be supported by the newcomers to Canada.

What we need to pay attention to right now is the unemployment rate. If companies start laying off people and jobs are reduced because companies are trying to save money because the cost of everything is going up, this will be a huge problem for the housing market if unemployment goes up. So far, we have a shortage of labour and wages are increasing so it’s a matter of time until we see the bottom of this correction.

Mortgage Trigger Rates

If you have a variable rate mortgage, these interest rate increases are going to set off some trigger rates. Each individual’s borrower trigger rate will be different so check with your lender. This applies if your payments stayed the same over the previous interest rate increases, you’ll notice the amount of principal paid was reduced and more of your payments went towards interest instead.

Now that interest rates have increased so much, when your payments aren’t covering the interest portion of your mortgage, this will set off the trigger rate. You have a decision to make.

You’ll need to either increase your payment amount, make a lump sum payment to push your trigger rate higher, or switch to a fixed rate mortgage.

Talk to your mortgage specialist, if you don’t have one, let me know and I can refer you to some of our partners.

If you have any questions about your real estate position or whether you should buy or sell right now, book a free call with me at this calendly link at a time that works for you.

Got questions about your real estate position or whether you should buy or sell right now? Book a free call with me at a time that works for you.