Interest Rates and How They Will Impact the Toronto Real Estate Market

Interest Rates and How They Will Impact the Toronto Real Estate Market

  • Giulia Gallina
  • 10/25/23

Toronto, often called Canada's cultural and economic heart, has cosmopolitan living, diverse cultural experiences, and robust economic opportunities. The city's skyline portrays historical architecture with modern skyscrapers, symbolizing its rich past and ambitious future. Beyond the structural beauty, Toronto offers a vibrant arts scene, world-class educational institutions, and a mosaic of neighbourhoods. From the buzz of the Entertainment District to the tranquility of the Toronto Islands, there's an environment for every preference. The amenities and opportunities available in Toronto make it a prime location for real estate investments.

Real estate as a 'safe-haven' and the factors influencing it

Real estate is often touted as a 'safe-haven' for investors, especially in turbulent economic times. When we refer to a 'safe haven,' we mean an investment that tends to retain or even increase in value despite broader market or economic downturns. Real estate often provides a sense of security as it's grounded in tangible assets — bricks, mortar, land — and is not as immediately volatile as, say, the stock market. However, like any investment, it's not immune to external pressures.

Among these various external factors that influence real estate prices and demand are interest rates, government policies (like land transfer taxes or zoning laws), economic growth or recession, population growth, urban development trends, and even global events like geopolitical tensions or global pandemics. Interest rates, in particular, hold significant sway, but understanding the interplay of all these factors helps those looking to invest in Toronto's dynamic housing market.

The basics of interest rates

Imagine interest rates as the "price tag" for borrowing money. When this "price" is low, it becomes cheaper for individuals and businesses to borrow. This borrowing can lead to consumers buying homes or cars or businesses expanding and hiring more employees. It's like when your favorite store has a sale; you're more likely to buy something because it's more affordable.

On the flip side, when the economy is running too hot, and prices of everyday items begin to rise rapidly (a situation known as inflation), central banks might raise interest rates. Why? Think of it as taking away the discount at the store. People might think twice before purchasing when things are no longer on sale. Similarly, when borrowing becomes more expensive, there's generally less spending and investment. This slowing down can help cool off an overheated economy and stabilize rising prices.

But why are interest rates so influential? The answer lies in their foundational role in our economy. Almost all economic activity involves money, and a large portion is borrowed. Whether it's a family taking out a mortgage for a home or a business seeking a loan for expansion, interest rates dictate the cost of that borrowed money. This widespread influence means even small changes in interest rates can have ripple effects throughout the economy, making them a dominating factor in economic health and decision-making.

The direct impact on homebuyers

When discussing the impact of interest rates on homebuyers, the conversation often starts and stops at mortgage costs. While it's true that the cost of borrowing is directly affected by interest rate fluctuations, there's a deeper, more nuanced story to be told about how these rates can shift the dynamics of the housing market.

The demand side of the equation

As we've established, higher interest rates make mortgages more expensive. But what does this mean in practice? Let's imagine a family approved for a mortgage at a specific monthly payment. When interest rates rise, the same monthly payment might only qualify them for a smaller loan. It can shrink the pool of homes they can afford, forcing them to look at less expensive neighbourhoods or smaller properties.

From a broader perspective, if many potential buyers face the same dilemma, overall demand for higher-priced homes might decrease. Conversely, when interest rates drop, the affordability factor improves, potentially increasing demand for homes.

The supply side of the equation

On the supply side, sellers are aware of market dynamics. If they perceive rising interest rates are cooling demand, they might be less inclined to list their properties, fearing they won't get their desired price. They could also be more willing to negotiate or reduce their listing prices to attract from the reduced pool of qualified buyers. Conversely, in a low-interest-rate environment witnessing robust demand, sellers might feel encouraged to list their homes at higher prices, expecting competition among buyers to drive up final sale prices.

The interplay between supply and demand

Like any other market, the housing market is governed by the principles of supply and demand. When demand decreases (due to factors like rising interest rates) and supply remains constant or increases, prices tend to drop. When demand increases (due to factors like falling interest rates), and supply remains stable or drops, prices tend to rise. This delicate balance determines the listing prices of homes, and interest rates play a pivotal role in tilting the scales.

The domino effect on developers and investors

Interest rates don't just affect homebuyers. Developers and real estate investors often rely on borrowed capital and also feel the pinch. Increased borrowing costs can deter them from launching new projects or investing in existing ones. If this slowdown is pronounced, it can lead to a reduction in housing supply in the future, thereby pushing prices up in the long term due to decreased availability.

The broader economic picture

Toronto's real estate market doesn't exist in a vacuum. If interest rates are being adjusted, it reflects broader economic trends. An economy facing inflationary pressures might see a rise in interest rates. In such situations, potential buyers might also grapple with increased costs in other areas of their lives. Their capacity to invest in real estate could diminish because of high mortgage costs and a general tightening of their financial belts.

Wrapping up Toronto's real estate future

In a bustling real estate market like Toronto's, buyers and investors must keep a pulse on interest rate trends. Stakeholders can make more informed decisions by understanding how these rates might shape purchasing power, property prices, and the broader economic landscape. As with any market, foresight and preparedness can be the key differentiators between a successful investment and a missed opportunity.

Guidance from a local luminary

While interest rates undeniably play a significant role in shaping the real estate landscape, having a seasoned expert to guide your journey can make all the difference. Giulia Gallina, with her deep roots in the Toronto area and an impressive 15 years of experience in the industry, embodies this expertise. Born into a real estate legacy — with both parents as agents and a grandfather who owned a brokerage firm — Giulia carries forward a family tradition of unparalleled service and insights. If you're considering buying or selling Toronto real estate, lean on Giulia's vast knowledge and local expertise. Contact Giulia Gallina to ensure your real estate decisions are informed, strategic, and rooted in generations of industry wisdom.

*Header photo courtesy of Giulia Gallina

Work With Giulia

With an extensive knowledge of various neighborhoods, I love removing any stress from a home purchase or sale and finding my clients the right property. My involvement in several older home renovations means I bring a wealth of knowledge, including construction and interior design, to clients looking to renovate after purchase.