Future Outlook: Key Factors Shaping Toronto's Real Estate Market
Often, when we speak with Buyers and Sellers, the most pressing questions are about the number of sales, how long the properties are sitting on the market, and the months of inventory. These are all lagging indicators of the market. They are important for understanding what is happening at the moment, but they do not predict where the market is headed. We would like to break down the broader factors that will shape the prices in the months to come.
The Canadian inflation data was released for the month of July, and CPI came in lower than the expected target. Headline CPI was just 2.5% y/y, the lowest reading in 40 months since March 2021. Even more telling is that Core CPI, a measure the Bank of Canada monitors closely, fell to 2.4%. One of the most significant contributors to the Consumer Price Index number was Mortgage Interest Costs, which added 1.8% to the inflation number. This is a component over which the Bank of Canada directly has control. As they continue to lower interest rates, the inflation on mortgage interest will come down.
Rents were up 8.3% y/y, contributing 0.6% to the CPI. However, we are starting to see very weak monthly increases in rents. This coincides with another strong month of purpose-built rental completions. With the dual impact of the looming slowdown in non-permanent residence growth and rising purpose-built rental completions, we are in for a downturn in the rental market.
With deflationary pressures on mortgage interest costs and rents, the Bank of Canada will likely continue to cut rates. The markets are pricing in cuts at every meeting for the remainder of the year (October 23rd and December 11th), with the overnight rate settling at 3.75%. There are also speculations of a potential additional 1% cut in the first nine months of 2025.
With inflation in check for the foreseeable future, the Bank of Canada will likely base its rate-cutting decision on the strength of the economy. We are seeing signs of weakness in different sectors.
Domestic Loans by Canadian Banks continue to fall both month over month and year over year. This is either a case of businesses choosing not to borrow due to a perceived lack of demand or banks curtailing lending due to perceived risks—or even both!
Toronto mortgage delinquencies are climbing at a very rapid rate. The rate climbed 0.02 points to 0.14% in Q1 2024, representing a 0.07 point increase since last year. Equifax data shows Toronto mortgage delinquencies climbed in Q1 2024 and now sit at the highest rate in 8 years.
The OSB filings showed that consumer insolvencies had one of the biggest Junes on record. A sudden surge of consumer insolvencies over the past year has the annual volume at the third-largest peak on record and the first outside of recession. They received 11,096 consumer insolvency filings in June (359 Per Day), an increase of 4.2% from last year.
Canadian Mortgage borrowing pulls back as annual growth remains unusually low for Canada and may be heading lower.
Mortgage originations (by volume) fell 15% y/y in June as the demand for credit wanes. This was one of the steepest annual declines in any month since early 2023 when the BOC raised interest rates.
We are going to see interest decline for the foreseeable future. The big question is will the Bank of Canada be aggressive enough to counter the strain it caused to the Canadian Economy.
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Cari and Paul