Toronto’s Real Estate Rollercoaster: Inflation, Rate Cuts, and Market Dynamics
Economists are anticipating a modest decline in the Consumer Price Index (CPI) data for June, set to be released on Tuesday. This comes after a surprising jump in inflation in May, which caught many market watchers off guard. In May, headline inflation rose to 2.9 percent compared to the previous year, up from 2.7 percent in April. This increase was primarily driven by a rise in the price of services within the economy, surpassing economists’ expectations.
This time, however, economists are confident that the data will show inflation resuming its downward trend, potentially giving the Bank of Canada the green light to cut interest rates at its next decision on July 24. Robert Kavcic, a senior economist at the Bank of Montreal, commented on the situation, noting that if June’s inflation report is favorable, it would mark five out of six months with positive data, justifying a rate cut.
In December of the previous year, headline inflation stood at 3.4 percent. Core measures of inflation, which the Bank of Canada prefers when making policy decisions, have also been steadily declining. David Rosenberg, the chief economist at Rosenberg Research & Associates Inc., stated that the May report was merely a temporary deviation from the downward trend in underlying inflation, and he expects the June data to reinforce this message.
Jimmy Jean, the chief economist at Desjardins, expects costs in services to remain elevated but believes that inflation in rental prices will peak after the significant acceleration seen since 2021. Jean forecasts a year-over-year inflation rate of 2.8 percent for June, down from 2.9 percent, which he believes would support a rate cut by the Bank of Canada.
Katherine Judge, an economist with the Canadian Imperial Bank of Commerce, also predicts a decrease in core measures of inflation. She expects this slowing pace to continue into the third quarter, with the headline CPI index likely to drop sharply due to base effects. Judge anticipates that inflation will average 2.3 percent year-over-year in the third quarter, with core measures decreasing more gradually as mortgage interest costs ease and demand remains soft.
The Bank of Canada had predicted in its April monetary policy report that inflation would fall below 2.5 percent in the second half of 2024. Two months later, Governor Tiff Macklem indicated that the Canadian economy was headed for a “soft landing.” However, Rosenberg argues that the central bank is behind the curve in cutting rates and should have acted sooner, citing a looming recession. He points to the rise in Canada’s unemployment rate to 6.4 percent in June and the loss of 1,400 jobs as evidence of this.
Recent data from the United States showed an increase in unemployment to 4.1 percent and a core inflation rate of 3.3 percent year-over-year in June, the lowest in three years. During a senate committee testimony, U.S. Federal Reserve Chair Jerome Powell acknowledged the risk of waiting too late to cut rates, emphasizing that reducing policy restraint too late or too little could unduly weaken economic activity and employment.
The market now predicts that U.S. Federal Reserve officials will announce an interest rate cut in September. This potential move could alleviate concerns about any divergence between Canadian and U.S. monetary policies and reinforce the Bank of Canada’s confidence in further rate cuts this year.
As the economic landscape shifts, the question remains: Will the anticipated decline in inflation be enough to justify the Bank of Canada’s rate cut, or is the looming threat of a recession a more pressing concern for policymakers?
In related news, a Reuters poll conducted between July 16 and 19 indicates that the Bank of Canada is expected to cut its overnight interest rate by 25 basis points to 4.50% on July 24. This move comes amid expectations that inflation will continue to fall. With the economy slowing and unemployment rising, the central bank is projected to implement two more rate cuts in 2024, although predictions remain cautious with some economists forecasting a policy rate of 4.00% by the end of the year.
Despite Canadian inflation easing further into the Bank of Canada’s 1%-3% target range, core inflation and wage growth remain sticky, warranting cautious optimism. The central bank had recently trimmed borrowing costs for the first time in four years and is expected to pause its easing cycle in September before resuming rate cuts in October and December. This strategy would see the Bank of Canada cutting rates twice before the U.S. Federal Reserve begins its easing cycle, anticipated in September.
Economists like Andrew Kelvin from TD Securities highlight that second-quarter CPI inflation is tracking below the Bank of Canada’s April forecast, suggesting the pieces are in place for another rate cut. While inflation is expected to stay around 2% through this year and 2025, risks of higher price pressures persist. The forecasted rate cuts reflect a delicate balance, as rapid adjustments in monetary policy could impact the once-booming housing market, now experiencing a decline due to higher mortgage payments.
As Canada’s economic growth is projected to average 1.0% this year before rebounding to 1.8% in 2025, nearly 70% of economists believe the end-2024 overnight rate is more likely to be higher than lower. This cautious outlook underscores the challenges ahead.
With these developments unfolding, the crucial question remains: Will the Bank of Canada’s cautious approach to rate cuts be sufficient to stabilize the economy, or will external factors such as global economic trends and domestic market pressures necessitate a more aggressive policy shift?
Supply in Canada’s Property Market Surges as Mortgage Renewals Loom
In a significant shift for Canada’s property market, a surge in supply is occurring as many homeowners face sharp increases in mortgage payments. This has resulted in the highest number of housing units for sale in Toronto in over a decade, indicating a potential drop in prices in the coming months.
Toronto, which accounts for two-thirds of the country’s condominium sales and serves as a bellwether for other major metropolitan areas, has seen inventories surpass the peaks reached ten years ago. However, despite the increase in available properties, sales have not kept pace. This imbalance between rising inventories and lagging sales highlights a high degree of stress in Canada’s largest property market. Real estate consultants suggest that this situation could lead to a series of defaults or a significant price correction.
Contributing to this surge are homeowners and investors who purchased properties five years ago during a period of record-low mortgage rates, aiming to benefit from Toronto’s lucrative rental market. These mortgages are now up for renewal in an interest rate environment that is dramatically different from five years ago, with significantly higher rates despite recent guidance from the Bank of Canada to lower them.
In Canada, unlike the United States where mortgage rates can be fixed for the entire duration of a 15 or 30-year loan, mortgages typically span 25 years and are renewed every three or five years. Under the current rates, many homeowners could see their mortgage payments double, according to calculations by ratehub.ca, a website that compares mortgage offerings. Next year, approximately CAD 300 billion ($219.33 billion) worth of mortgages at chartered banks will come up for renewal.
This financial pressure has led some investors to consider abandoning their units as they can no longer afford the payments. Carl Gomez, chief economist at CoStar Group, notes that while some investors want to walk away from their units, many are reluctant to lower their asking prices and record a loss on their investment. This reluctance to accept losses is delaying the necessary market adjustment.
The trend is particularly noticeable in the condominium market, where inventory levels are at historic highs. John Lusink, president of Right at Home Realty, Canada’s largest independent housing brokerage firm, describes the current scenario as a “buyers’ market with no buyers,” with the existing supply typically taking more than five months to sell.
Data from the Toronto Regional Real Estate Board shows a nearly 25% increase in listings in the first three months of 2024 compared to the same period last year, while sales have only increased by 5.3%. This disparity further underscores the challenges faced by the market.
The Bank of Canada’s upcoming rate decision on July 24 is widely anticipated, with most economists expecting another 25 basis point cut in the overnight rate. Last month, the central bank reduced the benchmark rate to 4.75% from 5% for the first time in four years. However, economists warn that even a reduction of 100 basis points may have a limited impact on mortgage rates up for renewal, as five-year fixed rates are linked to long-term bond yields, which are likely to remain in the 3% to 4% range.
John Lusink predicts that Toronto condo prices could drop by 10% by the end of the year. As the market continues to grapple with these challenges, the question remains: Will further rate cuts be enough to stabilize the property market, or are more drastic measures needed to prevent a larger economic fallout?
Toronto New Condo Sales Plummet to Lowest Level Since 1997 in First Half of the Year
New condominium sales in Toronto have plummeted to a 27-year low during the first six months of 2024, according to a recent report by Urbanation Inc. The report reveals that only 3,159 new condo units were sold in the Greater Toronto and Hamilton Area during this period. This represents a staggering 57 percent decline from the same timeframe last year and a 72 percent drop compared to the 10-year average.
This sharp downturn in new condo sales has been attributed to a significant decrease in construction starts in Toronto, which has heavily impacted inventory levels. Urbanation’s President, Shaun Hildebrand, highlighted that the combination of near-record-high condo prices and only a modest 25 basis point decline in interest rates in June has kept buyers cautious. The anticipation of further rate cuts, coupled with an increasing supply of units for sale, has led to a hesitant market.
The data paints a clear picture: the first half of 2024 has been the slowest for new condo sales since 1997. The report suggests that the weakening condo market conditions in the second quarter of 2024 will likely cause many projects slated for launch this year to remain on hold. Additionally, projects struggling to meet sales thresholds for construction financing may ultimately be pulled from the market altogether.
Urbanation also notes that the total number of unsold condo units in the Greater Toronto and Hamilton Area has now reached a record high of 25,189 units, equating to about 34 months of supply. This figure is approximately 10,000 more units than the long-term average. Despite this surplus, prices have remained relatively stable, with the average asking price for unsold units declining by just 2.6 percent over the past year and by only 4.5 percent over the past two years.
The stability in prices, despite the oversupply, demonstrates how “sticky” new condominium prices have become due to high development and financing costs, as well as the record prices paid for land at the market’s peak. This stickiness in pricing reflects the significant headwinds the GTA’s real estate market has faced over the last two years due to the substantial increase in borrowing costs.
In June, the average selling price of a home in the Greater Toronto Area, across all property types, was $1,162,167. This is down from a peak of $1,334,062 in February 2022, just before the Bank of Canada began its cycle of interest rate hikes.
As the market grapples with these challenges, one must consider the broader implications: Will the anticipated rate cuts be enough to revive Toronto’s condo market, or is the city on the brink of a more profound real estate correction? How will these developments shape the future of urban living in Toronto?
-The TanTeam Editorial
