As the Toronto real estate market continues to face challenges, the recent interest rate cuts by the Bank of Canada have sparked renewed interest in the question: will these lower rates be enough to stabilize and potentially save the market? For much of 2024, buyers and sellers alike have been grappling with shifting market conditions, including a rise in new listings, declining prices, and broader economic uncertainties. Experts are now weighing in on whether the reduction in borrowing costs will provide the relief the housing market needs.
The Impact of Lower Interest Rates on Buyer Behavior
One of the most immediate effects of lower interest rates is the increase in buyer affordability. With the Bank of Canada’s prime rate standing at 6.5% in September 2024, down from its peak earlier in the year, many potential buyers who had previously been priced out of the market are now able to qualify for mortgages. The lower rates reduce the monthly mortgage payments for new buyers, which can make purchasing a home more financially viable.
This increase in affordability has already contributed to a boost in home sales, with 4,996 sales recorded in September 2024, representing an 8.5% year-over-year increase compared to 4,606 in September 2023. For many buyers, particularly those in the more affordable condo and townhouse segments, the lower interest rates have created an opportunity to enter the market or upgrade to a larger home.
Additionally, longer amortization periods and changes to mortgage lending guidelines have allowed buyers more flexibility, particularly for homes priced over $1 million. These factors have encouraged both first-time buyers and those looking to move up the property ladder to act while interest rates remain favorable.
Will Lower Interest Rates Prevent Further Price Declines?
While the increase in buyer activity has been a positive sign for the Toronto real estate market, the question remains whether it will be enough to halt or reverse the current trend of declining prices. In September 2024, the average home price in the GTA fell by 1% year-over-year, from $1,118,215 in 2023 to $1,107,291. Prices dropped even more sharply in the condo and townhouse segments, with condo prices in Toronto (416) falling by 3.5% and townhouses in the 905 seeing a 0.5% drop.
The increase in new listings has been a key driver of the downward pressure on prices. The 10.5% year-over-year increase in new listings has created a more balanced market, giving buyers more options and reducing the intense competition that had previously pushed prices up. With 18,089 new listings added in September 2024 alone, compared to 16,377 in September 2023, sellers are facing more competition, leading to price reductions in many segments of the market.
While lower interest rates have boosted sales, experts suggest that the impact on prices may be more gradual. The large volume of listings, combined with economic uncertainties, means that prices are unlikely to experience significant upward pressure in the short term. Instead, Jason Mercer, TRREB’s Chief Market Analyst, predicts that the interest rate cuts will help stabilize prices rather than drive a dramatic recovery. “The interest rate cuts have certainly provided a boost to buyer confidence, but the market will take time to fully absorb the increased inventory,” Mercer said.
The Role of Inventory in Shaping the Market’s Future
One of the biggest factors determining whether lower interest rates will save the Toronto housing market is the level of inventory. The sharp rise in listings over the past year has created a more competitive environment for sellers, forcing many to adjust their pricing strategies. In September 2024, the average days on market (DOM) increased to 30 days, compared to 27 days in the same period in 2023. This indicates that homes are taking longer to sell, as buyers now have more options and are able to negotiate better deals.
The impact of this inventory surge is particularly noticeable in the detached home segment, where prices have fallen by 2.4% in the GTA and 1.7% in Toronto (416)(mw2409). In the 905 area, detached home prices dropped to $1,333,394, while in Toronto’s core, they averaged $1,423,056. The combination of lower prices and more listings has given buyers greater leverage, making it more difficult for sellers to achieve their desired sale prices.
For lower interest rates to have a lasting impact, the supply of listings will need to decrease or stabilize. If inventory levels remain elevated, price growth is likely to be constrained, even with increased buyer activity. John DiMichele, CEO of TRREB, noted that the current rise in listings may continue for some time, but he believes that lower interest rates will eventually lead to “a more balanced market“.
Expert Predictions for 2025 and Beyond
Looking ahead, most experts agree that the full impact of the Bank of Canada’s rate cuts will take time to materialize. The consensus is that while the interest rate reductions have already provided a short-term boost to sales, the longer-term effects will depend on whether buyer demand can keep pace with the continued influx of new listings.
Several key factors will influence the trajectory of the market in the coming months:
- Economic Conditions: The broader economic outlook, including inflation rates, employment levels, and GDP growth, will play a critical role in determining whether the market continues to stabilize. As of now, economic indicators such as employment growth and inflation remain stable, but any significant changes could affect both buyer confidence and inventory levels.
- Buyer Affordability: While lower interest rates have improved affordability for many buyers, particularly in the lower-priced segments, rising property taxes and inflation could offset some of these gains. Experts predict that affordability will remain a key concern for buyers, especially in high-priced areas such as downtown Toronto.
- Supply-Side Factors: If the number of new listings continues to rise, it could limit price growth even as sales activity increases. On the other hand, if supply begins to stabilize or decrease, particularly in high-demand segments such as condos and townhouses, prices could start to recover.
- Government Policies: Future changes to government policies, including potential tax incentives for first-time buyers or further adjustments to mortgage lending rules, could influence both buyer and seller behavior.
Real estate analysts are cautiously optimistic about the future, with many predicting a gradual stabilization of the market in 2025. However, they emphasize that the market is unlikely to return to the rapid price growth seen in previous years. Instead, a more measured recovery is expected, with lower interest rates providing a foundation for future growth but not a quick fix for the current challenges facing the market.
Conclusion: A Temporary Boost or Lasting Recovery?
The recent cuts to interest rates have undoubtedly provided a much-needed boost to the Toronto housing market, increasing buyer activity and helping to stabilize prices. However, experts agree that these lower rates alone may not be enough to save the market from its broader challenges, particularly the rising supply of listings and economic uncertainties.
While lower interest rates have improved affordability and encouraged more buyers to enter the market, the ongoing increase in inventory will likely keep prices in check for the foreseeable future. As the market adjusts to these new conditions, buyers are benefiting from more favorable terms, while sellers are facing a more competitive landscape.
In the end, whether the lower interest rates will “save” the Toronto housing market depends on a range of factors, including the supply of listings, economic conditions, and future policy changes. For now, the market appears to be stabilizing, but the road to full recovery may be longer than anticipated.
