Toronto’s condo market has experienced significant turbulence in 2024, and one of the primary factors behind the ongoing slowdown is the impact of rising interest rates. Despite an increase in available listings and relatively stable condo prices, the surge in mortgage rates—now at 6.5% for a 5-year fixed mortgage—is keeping many potential buyers on the sidelines. The rising cost of borrowing has made homeownership less affordable, and the once-thriving condo market has seen sales drop by 19.8% year-over-year.
This article explores the influence of interest rates on Toronto’s condo market, analyzes what’s driving buyers to wait, and delves into expert predictions on when the market might recover.
How Interest Rates Are Slowing Toronto’s Condo Market
The Bank of Canada’s efforts to control inflation have led to a series of interest rate hikes over the past two years, dramatically increasing the cost of borrowing. Higher interest rates mean higher mortgage payments, which directly affect housing affordability. For prospective condo buyers in Toronto, the rising cost of financing is making it harder to qualify for mortgages, and even those who do qualify are facing significantly higher monthly payments.
For example, the monthly mortgage payment on an average-priced condo of $741,916 in Toronto is now much higher than it would have been in 2022 when interest rates were lower. With mortgage stress tests requiring buyers to qualify at rates that are higher than the current mortgage rate, many buyers—particularly first-time homebuyers—are finding that the dream of owning a condo is becoming increasingly out of reach.
These high interest rates are creating a “wait-and-see” mentality among potential buyers, as many believe that rates could drop in the future. Rather than rushing into the market, buyers are choosing to delay their purchase in the hope of securing better financing terms down the line.
Affordability Concerns: Buyers Pushed to the Sidelines
As a result of rising interest rates, housing affordability in Toronto has reached new lows. While condo prices have only seen a modest decrease of 1.2% year-over-year, the increased cost of borrowing is making homeownership significantly more expensive. Even with more condos available for purchase—the market saw 16,917 new listings in Q2 2024, up from 12,396 in 2023—buyers are still holding back, largely due to affordability concerns.
The disconnect between price stability and sales volume highlights the central role that interest rates are playing in the current market slowdown. As financing becomes more expensive, buyers are forced to either reduce their budget, settle for smaller or less desirable properties, or opt to stay in the rental market for the time being.
Moreover, mortgage stress tests—which require buyers to qualify at rates significantly higher than the posted mortgage rate—are adding additional hurdles for buyers. This is particularly challenging for first-time buyers, who often lack the substantial down payments needed to offset the cost of higher monthly payments.
Expert Predictions: When Will Interest Rates Fall?
While no one can predict the exact trajectory of interest rates with certainty, many experts believe that rates may begin to stabilize or even fall by the end of 2024 or early 2025. Here’s a closer look at some of the factors influencing these predictions:
- Inflation Moderation: The Bank of Canada has been raising interest rates to control inflation, which spiked during the pandemic. As inflation begins to moderate, there is a possibility that the central bank will pause rate hikes or even start to reduce rates. Some economists predict that the Bank of Canada could begin cutting rates if inflation continues to cool, which could help reignite buyer interest in the housing market.
- Global Economic Conditions: The broader global economic landscape will also play a role in determining the future of interest rates. Economic slowdowns in key global markets, combined with potential recessions, could prompt central banks to lower rates to stimulate growth. If Canada’s economy shows signs of weakening, the Bank of Canada may adjust its monetary policy to foster economic recovery, which could include rate cuts.
- Market Confidence: Consumer confidence is closely tied to interest rates, and if buyers sense that rates have peaked, we could see renewed activity in the condo market. Some buyers may choose to lock in rates once they perceive that borrowing costs are stable or declining, leading to increased sales activity. However, if rates remain high or continue to rise, buyer hesitancy could persist well into 2025.
How Much of a Difference Would Lower Interest Rates Make?
For many potential buyers, lower interest rates could make a significant difference in terms of affordability. A reduction in interest rates could decrease monthly mortgage payments, allowing buyers to qualify for higher loan amounts and making homeownership more accessible. For example, a drop in rates from 6.5% to 5.5% could save buyers hundreds of dollars per month on a typical mortgage, potentially easing the financial burden and encouraging more buyers to enter the market.
Additionally, lower interest rates could stimulate demand, leading to increased competition among buyers and potentially pushing prices higher again. This means that while buyers may benefit from lower borrowing costs, they may also face renewed pressure in a more competitive market.
What Happens if Rates Stay High?
On the flip side, if interest rates remain elevated or continue to rise, we could see a prolonged period of reduced buyer activity in Toronto’s condo market. Higher rates would continue to dampen affordability, keeping many first-time buyers on the sidelines. This could lead to an increase in inventory levels, as more properties remain unsold, and sellers who are unable to sell may be forced to lower their asking prices to attract buyers.
For investors in the condo market, higher interest rates could lead to slower returns on investment. Investors relying on rental income may benefit from higher rents in a tight rental market, but those looking to sell properties may find fewer buyers willing to commit in the current interest rate environment.
Will Buyers Return to the Market?
While the current outlook for Toronto’s condo market is largely influenced by interest rates, buyers may eventually return to the market if certain conditions improve. For example, if interest rates begin to fall and financing becomes more affordable, we could see a surge in buyer activity as those who have been waiting on the sidelines rush to take advantage of better mortgage terms.
Additionally, if condo prices begin to fall further in response to slower sales, buyers may perceive better value in the market, leading to increased demand. However, this scenario depends on how long sellers are willing to hold out before reducing their prices.
The Rental Market: A Temporary Solution?
For many would-be buyers, the alternative to purchasing a condo is remaining in the rental market. Rental demand in Toronto remains strong, with the average rent for a one-bedroom condo rising to $2,678 in Q2 2024, a 5.5% increase year-over-year. While renting offers more flexibility and fewer upfront costs, it doesn’t provide the same long-term financial benefits as homeownership.
Many renters are waiting for a more favorable interest rate environment before making the leap to homeownership. However, if rates stay high for an extended period, more buyers may opt to remain renters for the foreseeable future, which could continue to drive up demand and prices in the rental market.
Conclusion: The Road to Recovery
Toronto’s condo market remains heavily influenced by interest rates, and until rates begin to fall, buyer hesitancy is likely to persist. For now, affordability remains a challenge, particularly for first-time buyers, and the decision to buy will depend largely on the future trajectory of mortgage rates.
Experts remain cautiously optimistic that rates could begin to fall in late 2024 or 2025, which would provide much-needed relief to buyers and potentially spark a market recovery. Until then, both buyers and sellers will need to navigate a landscape defined by high borrowing costs and ongoing market uncertainty.
