Toronto’s Real Estate Market Faces Uncertainty Despite Potential Rate Cuts

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Toronto’s real estate market, Canada’s largest, ended the year on a surprisingly robust note, with sales in December getting a lift from lower credit costs, which are anticipated to decrease further in the coming months. However, despite this uptick in demand, prices continued to fall, prompting BMO to caution investors about the persistence of this trend due to ongoing affordability challenges.

Toronto’s housing market showed increased activity towards the year’s end. Seasonally adjusted home sales across the Toronto Regional Real Estate Board (TRREB) rose by 21% compared to the previous month and were nearly 12% higher unadjusted year-over-year. Sal Guiatieri, a senior economist at BMO, notes that this resurgence brought unit sales back to levels seen in June, just as the Bank of Canada was gearing up for another round of rate hikes.

The decline in fixed-rate financing costs, influenced by Government bond yields, is seen as a key driver of this recent surge. Regulatory data indicated that the average interest for a new 5-year fixed-rate mortgage was 5.78% in October, with current rates advertised by lenders dropping to around 4.79%. This reduction mirrors the approximate 1-point decline in Government bond yields over a similar period.

Despite the optimism spurred by cheaper credit and robust population data, the market’s recovery is not assured. BMO warns that the recent increase in activity may not be sufficient to halt the downward trend in prices, as benchmark prices have reportedly fallen for the fifth consecutive month. The bank also highlights that the increase in sales was not robust enough to indicate support at current price levels, particularly against the backdrop of rising inventory.

BMO’s forecast of a potential Bank of Canada rate cut by June aligns with expectations from most financial institutions. This prospect, coupled with signs of low inventory and rising rents, may appear bullish for investor returns. However, BMO cautions that poor affordability could lead to further price softness in the months ahead.

In summary, while Toronto’s real estate market has shown some signs of revival, largely driven by expectations of reduced financing costs, the market continues to grapple with affordability issues. This complex dynamic presents a challenging landscape for investors and homebuyers alike as the market navigates through a period of uncertainty and adjustment.

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