And we’re off, folks.
On Wednesday, after much anticipation, the Bank of Canada doubled the benchmark interest rate from 0.5% to 1%, marking the most aggressive rate hike since 2000.
With the goal of reigning in inflation, this increase was far from a surprise. At some point, the flow of cheap money that floated us through the pandemic was sure to slow down.
But for Canadians accustomed to cheap money while carrying record levels of household debt, and also facing rising costs in most every aspect of their life, it’s a sobering moment made all the more daunting by the reality that this is simply one of a number of rate bumps we are likely to see this year.
The psychological impacts of these rate hikes cannot be overstated. Buyer psychology is enough to cool markets.
In cities like Toronto where housing prices are objectively outrageous, buyers have long needed to dig deep in order to summon the mental fortitude required to get in the game. Now add-in uncertainty and fears of market correction spurred on by what we remember from the 2008 subprime mortgage crash in the US, that fortitude will surely give way to pause.
In the immediate short-term there will be people who have already bought at the peak and have been prepping their houses to sell. Now say they don’t read the paper or their agent doesn’t pay much attention to this market, they might have no idea what’s underfoot. They might still be banking on listing low and waiting for the bullies to roll in. They will likely wonder why they’re not being swarmed with showings. They will certainly be shocked when offer night rolls around and no one shows up to bid. Then, you can bet, they will be panicking.
I say this because this is exactly what is already happening.
Last week, I watched as offer nights came and went on four houses that would have inarguably been a bun-fight mere weeks ago. Good, though maybe not great, houses in desirable neighbourhoods that pandemic buyers would have absolutely flung themselves at, in no way dissuaded by a bizarre layout, a mutual drive, or location on a busy corner.
What are we to make of this?
The urgency has now vanished from the marketplace. The FOMO is gone. Buyers are still out there, absolutely, though perhaps in smaller numbers but certainly more inclined to sit back and wait. Those houses will surely sell, but it won’t be in the blowout we have grown so accustomed to seeing.
For those wondering if this means the bubble has now burst, I would say that unless the rate hikes keep coming hard and fast, we are unlikely to see a sharp or immediate decline in prices any time soon.
Particularly in cities like Toronto where demand will always be strong with a large pool of buyers with big jobs and big salaries, I think it is more likely that we will see a little dip in the coming weeks that will functionally cleave off some of the froth from the past few months. The market will slow and then prices will largely hover and go sideways for a while.
But as long as inventory is low and we still have qualified buyers, multiple offers on good homes in desirable areas are likely to stay. However, the days of a guaranteed bidding war on anything with a sign on the lawn might be a thing of the past — at least for now.
Agents are going to have to work it again.
Of the 60,000-plus agents in the city, how many have experience working in a down market? How many think selling a house is the same as listing a house? As in, you take some photos, slap a sign on the front lawn, and then wait for the offers to roll in. How many have learned the value of cultivating relationships with colleagues? The value of a good agent will never be more obvious than in the coming months.
And in the meantime, it will be the people with the most to lose who will be the most affected. Almost all of us will feel the sting of increased borrowing costs. But for those already feeling the agonizing pressure of how to make ends meet, this could well be more than a sting — it could be a death blow.
Like the novice speculators who casually picked up an investment condo or two without ever considering the concept of negative cash flow. Or the buyers who paid Toronto prices for preconstruction in the ‘burbs who will find themselves unable to close after the bank appraises the property at less than they paid for it.
Those will be the casualties.
The deep-pocketed and institutional investors who understand that real estate investment is a long game will ride it out and be just fine. The people who are in over their heads unable to ride this out simply won’t be.
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