I have 3 pieces of important news to share with you today.
#1 The interest rate announcement
#2 The Toronto real estate market report for August
#3 How low can prices go in Toronto?
Let’s get started right away.
#1 The Interest Rate
September 6 was a big day.
Everyone was waiting to see what the Bank of Canada would do about the interest rate.
A few days prior to that, Ontario Premier Doug Ford wrote a letter to the Bank of Canada.
“Over the last 18 months, we’ve suffered ten interest rate hikes…
These hikes have forced many families to pay thousands of dollars more per month just to cover their mortgage payments.
Ontarians simply cannot cope with the higher monthly payments on their homes brought about by repeated interest rate hikes.”
He urged the Bank of Canada to stop the rate hikes.
He suggests that the cost of everyday essentials can be reduced by other methods.
For example, the governments can create higher-paying jobs through the building of critical infrastructure projects and improve the production of goods and services.
And Doug Ford was not the only one, the British Columbia Premier also sent a similar letter to the Bank of Canada.
Whether these letters worked or not, we don’t know.
But as a matter of fact, the Bank of Canada decided to hold the interest rate at 5% on September 6.
That’s great news indeed because the economic growth is slowing down and the job market is cooling.
I don’t think we want to see a big recession.
Most major banks and economists think that the Bank of Canada’s next move will be a rate cut, in early 2024.
In the meantime, is the current rate hold decision going to change anything in the Toronto real estate market?
I’ll give you my take on that after we take a look at the latest market watch report.
#2 The August Market Watch Report
Back in August, there were still a lot of uncertainties about the Bank of Canada’s rate decision in September.
Some people were worried about another rate hike and they decided to wait and see.
So overall, the market in August was still sluggish, not much changes from July.
There were around 5,200 transactions in each month.
Prices were slightly trending lower by around 1% or so.
Now that the Bank of Canada has decided to hold the interest rate, is that going to change the market?
Typically, the fall is a busy season in Toronto real estate.
People are back from their summer vacation.
Weather is still nice, so buyers and sellers want to get their transactions done before winter comes.
This year, we won’t see a typical fall season.
The rate hold decision is going to spark things up a little.
We have already noticed an obvious increase in showing activities in the last few days.
But overall, I don’t think we would see dramatic changes.
The market will most likely stay more or less flat until next year.
I see this as a good thing because if the market is recovering too fast, the Bank of Canada is probably going to raise interest rate again.
#3 How Low Can Prices Go in Toronto?
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Last week, Desjardins published a report about how low prices can go in four different scenarios.
Of course, we are most interested in the worst case scenario.
First, let me show you how these scenarios are defined.
There are three recession scenarios.
The first one is an average recession.
You can see that the employment rate would sit above 7.5% for the next three years.
The second one is using the conditions in July this year, with a mild recession factored in.
The third one is a 1990s style recession.
What does that mean?
It was the worst downturn in Ontario’s recorded history.
It took 4 years for output to return to the level before recession, 7 years to recoup employment losses and more than 12 years for home prices to recover.
Very scary indeed.
If the same kind of recession hits, we would see an unemployment rate above 12% by 2025.
The fourth scenario will be the most optimistic scenario.
Now, let’s see how prices would be affected in each of the four scenarios.
We would be using prices in July this year as a reference point.
Let’s start with the base case, which is a mild recession.
By the end of 2024, prices will be 4.9% higher than July 2023.
And by the end of 2025, prices will be 9.3% higher than July 2023.
What about an average recession?
2024, we will see 4.8% lower prices.
2025, we will start to see some recovery, with prices being 3.2% lower.
Here comes the worst case.
Prices will be 16% lower by the end of next year.
By the end of 2025?
We would see a 29.6% drop.
How many of you are waiting for that worst case to happen?
How many of you are thinking, only 30%? Even with the deepest recession in Ontario’s history.
In any case, I really hope we won’t see the worst case because the economic impact would be devastating.
What about the most optimistic scenario?
The assumptions are: strong population growth continues and new listings remain about 15% below the equilibrium level.
We would see prices up 10.9% by the end of next year.
And up 14.8% by the end of 2025.
In that case, prices will be 2.2% above the peak we had in February 2022.
You see, what actions you take will depend on which scenario you believe in.
Of course, no prediction is absolutely correct.
But I really see these scenarios as 4 different kinds of mentalities.
If you are on the positive side, mild recession or better, then of course it makes sense to invest now.
Which scenario do you believe in? Comment below and let me know.
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