Impacts of interest rate increases on Ontario’s housing market: Teranet
Teranet recently released a market insight report detailing the impact of interest rate increases on Ontario’s real estate market.
The report examined the impact of interest rate increases on properties of various different values as well as properties which were classified as either premium or moderate based on the sale value of the home.
According to the report, for a given calendar year, premium homes were those in the top 25 per cent of sales values with the remaining ones considered moderate. The report revealed that in the Greater Toronto Area (GTA), a premium non-condo home value’s benchmark grew significantly from 2018 to 2022, but by Q1 2023, the base price for a premium non-condo dropped. In terms of premium condo home values, they experienced a rise from 2018 to 2022 as well, until Q1 2023 when the base price for a premium condo also dropped.
“From these historical trends, it is apparent that while the price appreciation in urban areas has been widely reported, price appreciation outside of the GTA and Ottawa was actually more significant than the urban centres in both the condo and non-condo segments,” reads the report. “In addition, as expected, much of this increase in the non-urban areas occurred during the pandemic housing rush of 2021 and 2022. While we haven’t seen any supporting data, we will monitor whether the supposed return to city-life from those who fled to non-urban areas during the pandemic will cause further price differentiations between urban and non-urban areas.”
The report also noted that in Ontario, moderate non-condo property purchases have been steady between 2018 and 2021, before dropping in early 2022 as a result of the eight rate hikes that took place. “During the series of 2022 interest rate hikes, we observe a significant drop off of the premium market, while the moderate segment held on in terms of volume through 2022 before dropping further in Q1 2023 for a 30 per cent year-over-year decline,” reads the report. “When focusing on the GTA non-condo segment during 2022, we can see that in the spring, moderate and premium properties were almost equal in volume, until the continued rate hikes caused the premium segment to drop down to only 30 per cent of its peak volume by Q4 2022, which continued into Q1 2023. The moderate segment maintained relatively stable volume through 2022 despite six rate hikes that year.”
According to the report, in 2022, the GTA condo segment experienced moderate condo properties keeping a steady pace throughout the year with sales of premium properties dropping significantly. “Since the rate hikes began in March 2022, sales transactions in both the greater than 5 years and 1-to-5-year ownership tenures decreased in line with general market trends, but the sales of properties held for less than one year maintained and even increased to represent 22 per cent of overall transactions in Q4 2022 and Q1 2023 in Ontario,” reads the report.
In terms of quick sales, condo properties appeared to be more prone to them during 2022, as a third of Ontario condos sold were held for less than a year after sale. “Both premium and moderate properties exhibited the same trend in terms of the increase in the number of properties sold within the first year of ownership,” reads the report. “In summary, the recent increase in selling after a short holding period may suggest home ownership stress for those who purchased at the peak of the housing market. We will continue to monitor these trends through the busy spring and summer market, as well as developments in the interest rate curve.”
In Ontario, the ratio of property purchases with and without a mortgage at the time of purchase has been stable, at 80 per cent and 20 per cent, respectively, according to the report. The report noted that movers were one of the smallest home purchasing groups in Ontario with first-time homebuyers proving to be the top home purchasing group. Multi-property owners proved to be emerging as the other major home purchasing group in the province since the pandemic.
Some additional trends that the report observed include that non-urban areas grew more in value than urban areas. “It remains to be seen whether this value will start to decline as those who fled to non-urban areas during the pandemic return to city life,” reads the report. “Additionally, there was a notable increase in homeowners selling within one year of ownership in recent quarters and, there was a greater proportion of buyers purchasing without a mortgage, particularly by multi-property owners and other buyers.”
The report also noted that the premium property segment grew significantly in Ontario to almost equal market share.