Toronto home prices fall for fifth straight month

Bloomberg

Toronto home prices fall for a fifth straight month, the longest skid since 2017, as the property market adjusts to sharply higher interest rates from the Bank of Canada.
The benchmark price for a home in Canada’s largest city dropped 2.8% in August compared with the month before to reach C$1.12 million ($854,000), according to data by the Toronto Regional Real Estate Board.
That brings the total price decline to nearly 16% since March — the biggest five-month drop since the measure started being tracked in 2005.
In March, the central bank began raising its benchmark interest rate from an emergency low of 0.25% to rein in the highest inflation since the 1980s. It’s now 2.5%, representing one of the most aggressive rate-hiking campaigns in decades.
While inflation remains stubbornly elevated, one immediate effect of higher rates was to cut the borrowing capacity of most prospective home buyers. That forced sellers to drop prices quickly to find a level where they could get a bid.
Variable mortgage rates at Royal Bank of Canada, the country’s largest bank, have risen to 4.5%. Canadian home buyers piled into floating-rate loans last year to try to keep their payments lower amid soaring prices. Now their interest costs are being reset higher every time the central bank boosts the policy rate. Borrowers who want to lock in their rate for five years at RBC pay more than 5.5%.
Still, the monthly data brought some hints that the market slide may be easing. Transactions were up 11% in August from the previous month on a seasonally-adjusted basis. The ratio of sales to new listings rose, generally a sign that demand is starting to balance out supply, the real estate board said.
Average selling prices were actually up 2.1% in August compared with the month before, though the real estate board said that was likely because larger, pricier homes accounted for a greater share of transactions, a compositional effect that the benchmark price is designed to smooth out.
Real estate buyers will almost certainly have to contend with even higher borrowing costs in the near future. Financial markets are currently betting the Bank of Canada will raise the policy rate by three-quarters of a percentage point next week, according to data compiled by Bloomberg.
Higher rate expectations have prompted a number of economists to predict Canada’s real estate correction is not over, with cities like Toronto, which saw the biggest run-ups during the early part of the pandemic, hit the worst.
Federal regulations require Canadian mortgage lenders to conduct a “stress test” on borrowers to gauge whether they can handle higher rates. The test was implemented at a time when prices were rising and rates were low, and the Toronto real estate board’s top executive is now calling for a review.
“The Office of the Superintendent of Financial Institutions should weigh in on whether the current stress test remains applicable,” Chief Executive Officer John DiMichele said in a statement. “Is it reasonable to test home buyers at two percentage points above the current elevated rates, or should a more flexible test be applied that follows the interest rate cycle?”