©Copyright by top real estate agent in Toronto/GTA, senior broker, Daisy Huang, July 2022.

What will happen to Toronto home prices if interest rates rise to 20%? This is the topic of today’s episode.

As of June 2022, affected by the substantial interest rate hike by the Central Bank of Canada, although the average property price in the Greater Toronto Area is still up 5% year-on-year, the average price has fallen back to the 20-year baseline compared with the previous month.

What everyone is most concerned about at the moment is: How will interest rate hikes and  the hike expectations affect the trend of property prices in Greater Toronto? Each period has its own era context and uncertainties. I do not intend to predict the future, but we can learn from experience and get some references from history. The time that is most similar to the current inflation environment can be traced back to more than 40 years ago, that is, the late 1970s and 1980s… Take the United States in the picture below as an example. At that time, double-digit inflation forced the Federal Reserve to push up the base interest rate to an incredible 20%. When we look back at the property price trend at that time, we are surprised to find that throughout the whole era of high interest rates, home prices kept a slow and steady rise.

The judgement of anything must be based on the understanding of its essence; Daisy Huang believes that the reason for this wave of inflation is not excessive demand, but a shortage of supply. The supply shortage is fundamentally a combination of several long-term factors and short-term triggers in recent years. The main triggers are:

  • Russian-Ukrainian war leads to global food and crude oil shortages
  • Growing pain caused by the re-distribution and re-shaping of the global supply chain under the momentum of de-globalization
  • As the world’s factory for decades, China’s recent waves of epidemics have led to disconnection, instability, increased costs, and reduced efficiency of global supply chains nodes in China

Of course, there are also long-term factors that have accumulated over a longer period of time: including the impact of “sustainable” strategies on the costs of energy and agriculture; many middle- and high-income countries, including China, have low birth rates, draining labor supply, and driving up labor costs.

It can be said that central banks have to raise interest rates to deal with the current inflation, and it can even be said that the central bank is trying to show that it is “doing something”. But we must understand that raising interest rates is always a double-edged sword. While suppressing inflation, if you maintain high interest rates long, it is very likely to lead to economic recession. That is the reason we have historically seen central banks rush to cut rates once inflation has been effectively controlled.

Under the pressure of interest rate hikes and inflation, the consumer confidence index in US and Canada is declining. In other words, the negative effects of interest rate hikes have begun to appear. Once inflation is under control, the central bank is bound to cut interest rates. It’s worthwhile mentioning that inflation is calculated on a year-on-year basis, which is compared with the figures 12 months ago. It is conceivable that the price of prices under the suppression of interest rate hikes next year will basically rise to its full this year. Next year inflation rate will definitely decline, therefore it is self evident what the Central Bank of Canada will do for the sake if the economy when time comes.

At the same time, Canada’s 8% inflation rate in June this year has pressured people to consider how to preserve their wealth. Holding high-quality assets, including real estate, is a good way to defend against currency depreciation. In fact, inflation and rising mortgage rate costs have been transmitted to rents in real-time, causing rents in the Greater Toronto Area to climb rapidly in recent months, rising 20% ​​year-on-year in June. From the perspective of more than half a century of history, the increase in rent and changes in interest rates are highly correlated. In the early 1980s, when the US interest rate was 20%, the rent increase immediately exceeded 20%. Therefore, when property prices enter a period of saddle state, Toronto’s home price/rent ratio will fall as rents rise, and become more healthy.

Next, let’s talk about asset allocation under current circumstances in the foreseeable future. The impact of the global COVID-19 outbreak on the stock market began in March 2020. If we regard that time as an equilibrium point of asset allocation, we can see from the following figure that whether the stock market or the housing market, after experiencing different increases in the epidemic, whether the Dow Jones index representing traditional industries, the high-tech Nasdaq index, or the housing price index in the Greater Toronto Area, their increase% have been adjusted and tend to be similar. It can be said that asset allocation around the world has stepped out of the noise caused by COVID and is back on track. One difference is that under the current conditions of high inflation and rising interest rates, the market has begun to avoid “storytelling” assets and prefer real and tangible assets, and this is why we call real estate as “real estate”. GTA real estate rose 42% from pre-pandemic to post-pandemic, lower than Nasdaq’s 45% and higher than the traditional industry Dow Jones Index’s 35%.

In conclusion, inflation, rent, and interest rates all exert forces on property value from different directions, just like the forces and reaction forces in different directions in physics, and everyone will have his/her own theory of where the home price will go. However, the fundamentals of the real estate market will always be the attractiveness of the city to the general population. Toronto has been rated as the top ten most livable cities in the world by the Economist magazine for more than ten consecutive years. Who wouldn’t want to buy a home in one of the world’s most liveable cities, if they had the money? Combined with Canada’s friendly immigration policies, these are the real market fundamentals.

A healthy and balanced market is the foundation of Toronto’s long-term health in real estate. Whether buying or selling, smart participants need to have a good sense of reality, strategic awareness, and professional decision-making and execution capabilities…

  • In a high inflation environment, there is basically no room for a sharp drop in house prices, whether from the perspective of new house construction costs or pure wealth preservation
  • Higher interest rates do lead to lower purchasing power, but at the same time property is also an effective asset against currency depreciation
  • The cooling-off period of a property market is the best time to “hunt” for a good home at the best price, but it requires insight, professionalism, and decisiveness
  • Despite rising interest rates, current borrowing rates remain below 8% inflation
  • During the historically high interest rate years, house prices have not fallen sharply, but have continued to rise steadily
  • Positive mindset is the fundamental driving force for the survival and development of human beings from primitive society to the present. From the journey of history, all shorts are finally swallowed by longs

The cooling-off period of a real estate market is the most suitable for buy low. The next episode of “Daisy Realty List®” will share a batch of snapshots of the current Greater Toronto market, hoping to provide you with an edge. See you next time.


Originally written and all copyright© reserved by Daisy Huang www.daisyrealty.ca, top real estate agent in Toronto and GTA, senior broker. High Value. Delivered.

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