Over the last decade in the Toronto area, this increase has averaged 8% per year - but not this year.
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The spring market is usually the busiest time of the year for real estate sales with sales typically increasing between March and April. Over the last decade in the Toronto area, this increase has averaged 8% per year.
But this year, the opposite is happening.
Home sales in the Toronto area were down 26% in April over last month and lower than sales in February as well.
I believe there are three primary reasons for why this is happening.
Rising Interest Rates
The most common explanation we are hearing for the decline in sales is rising interest rates, but I don’t think that’s the primary reason yet. Many home buyers who get a mortgage pre-approval from their lender will typically also get an interest rate hold — a written commitment from their lender to finance their mortgage at a given interest rate provided that the buyer purchases a home within 120 days. While five-year mortgage rates are in the 4% range today, many active home buyers secured a rate hold back in February when mortgage rates were in the high 2% range and these buyers are likely feeling a sense of urgency — not hesitation — as they want to buy before their rate hold expires. Given this, I think we will need to wait until next month, when many of these rate holds will expire, to see more clearly how higher rates impact demand.
This is not to say rising rates are not also causing some reduced demand as well as some buyers move to the sidelines for now in the expectation that higher rates may cause home prices to decline further as we move into the summer and fall market. Rising rates are causing a mix of effects.
Fast-Tracked Demand
I believe another key factor is an expected and natural decline after the surge in sales we have experienced over the past two years. The Covid-19 pandemic along with record low interest rates pulled a lot of people’s home buying plans forward, which has caused a surge in demand (and prices) for homes over the past two years across the Toronto area and beyond. As this demand is fulfilled, we should expect to see a corresponding decline following the boom. Accordingly, I noted the first signs of slowing in demand back in February, before the surge in 5-year mortgage rates and before the Bank of Canada started their super-sized interest rate hikes.
Increased Buyer Anxiety
Among a particular set of home buyers, upsizers and downsizers who want to move from one home to another, the uncertainty of the market right now is causing a pullback from the market. These would-be buyers who would need to sell their current home in order to afford their next home are seeing that the market is slowing and prices softening and do not want to find themselves pressured to have to sell in a slowing market after they have bought at a peak. This group will only return to the market if the market stabilises or — in the event of continued slowdown — they decide to sell first before buying.
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