Toronto Home Prices Drop Most in Two Years as Rates Slam Market

(Bloomberg) -- Toronto home prices declined for the second straight month as higher borrowing costs start to bite in what has been one of the world's hottest housing markets.

The average price of a home in Canada's largest city declined 6.4% in April from the month before on a seasonally-adjusted basis, to C$1.2 million (about $936,000), according to the Toronto Regional Real Estate Board. That was the biggest monthly drop since April 2020, when the market was largely frozen because of Covid-19 lockdowns. 

Buyers slammed on the brakes last month. The number of houses sold in Toronto declined 26% in April compared with March, according to the board's seasonally-adjusted data. Vancouver home sales also dropped sharply.

The declines are happening as the Bank of Canada embarks on what's expected to be one of the most aggressive campaigns to raise borrowing costs in the institution's history. Since the beginning of March, the central bank has lifted the benchmark interest rate from 0.25% to 1%, and markets expect the rate to rise to at least 1.5% on June 1.

Canada's 50% rise in home prices in the past two years was driven in part by emergency-low rates that helped the economy through the Covid crisis. The rate reversal has left the nation's housing market, and particularly places that saw massive gains such as Toronto, looking increasingly vulnerable.

“Housing price growth is unsustainably strong in Canada,” Carolyn Rogers, the Bank of Canada's senior deputy governor, said Tuesday after a speech. “It would not be a bad thing for the economy, for the growth in housing prices to moderate a bit and we do expect that to happen as rates go up.”

Despite the recent slowdown in activity, Toronto's housing market remains historically tight. At the end of April there were only 13,098 properties left for sale in the city, and it took just 11 days on average for a listing to sell, the real estate board said. But both numbers were up from March, in a sign buyers are seeing a little more choice and some increased bargaining power.

“Based on the trends observed in the April housing market, it certainly appears that the Bank of Canada is achieving its goal of slowing consumer spending as it fights high inflation,” Kevin Crigger, the Toronto real estate board's president, said in a press release. “Negotiated mortgage rates rose sharply over the past four weeks, prompting some buyers to delay their purchase.”

However, with mortgage rates now at their highest in about two years, and home prices still far above last year's levels, some of April's drop in sales may have simply been due to people being priced out of the market. A separate report Tuesday from Canada's national housing agency said that Toronto's home-building efforts are badly lagging behind its population growth -- so it may be some time before there is truly a balance between supply and demand.

“Buyers who have moved to the sidelines will not remain there forever, and the population of our region will continue to grow on the back of immigration,” John DiMichele, the Toronto board's chief executive officer, said in the release. “In the absence of new supply, we will build a significant amount of pent-up demand that will need to be satisfied in the not-too-distant future.”

©2022 Bloomberg L.P.