In a time when everything seems divisive, from politics to entertainment, the one thing that everyone agrees on is that life has become extremely expensive. The rise in inflation has caused us to see a rise in prices from groceries to housing. The financial challenges extend to the housing market, where many who make a good living and have been approved for a mortgage will label themselves as ‘house poor,’; many millennials or young adults continue to rent due to being priced out of the housing market.

The Bank of Canada has not raised rates in the last two quarters, but it has not dropped them either, which has significantly impacted mortgages and the housing market. What exactly does this mean for the future of Ontario house prices and those wanting to invest in real estate?

How Interest Rates Affect House Prices

House prices, like any consumer product, are impacted by supply and demand. Higher interest rates cause an increase in mortgage rates and a decrease in consumer purchasing power. Many prospective home buyers will shy away due to daunting costs and expenses. In theory, the decreased demand will force sellers to lower housing prices as there aren’t many consumers able or willing to pay the asking price. Of course, the reverse happens when interest rates lower with increased consumer confidence and buying power, leading to more competition in the housing market.

The Variability of Different Markets

While interest rates are a significant factor in housing prices, the impact will vary depending on the market, especially considering heavily populated regions like the GTA and Ottawa. Ontario is experiencing rapid population growth, exceeding the number of new homes built to meet this demand. The rapid growth means people who work in Toronto are branching out to cities like Milton, Barrie, and Brantford to find comparatively more affordable housing. Those markets experience significant housing price increases due to the sudden influx of housing needs. The problem is the high interest has meant that some prospective homeowners are still being priced out and resorting to renting while waiting for more affordable mortgage rates.

The variability of the different markets in Ontario is also significantly affected by the economics of that region. Higher-income households can qualify for high-interest mortgages without the same financial burden or uncertainty and benefit from lower mortgage payments while interest rates increase. This will translate to more competition in markets with far more high-income house seekers. The impact of high interest is much more significant on lower-income households as they will need more money to secure financing due to increased costs. A market with many lower-income families will lead to a substantial decrease in demand. At the start of 2024, the housing market has been sluggish, with many homes being up for sale much longer than before the pandemic.


The Future of Interest Rates in 2024

To the surprise of some real estate analysts, the Bank of Canada announced on April 10 that the key interest rate will hold at a 23-year high of 5%. This means the housing market will likely remain soft in many Ontario regions as mortgage rates will remain too high for many prospective home buyers. The Bank of Canada says the cut to the interest rates will be gradual, with most analysts foreseeing a drop near the end of 2024, leading to lower rates in 2025. Some experts predict the interest rate will drop by 1.5% this year. This should lead to greater confidence for prospective buyers and more opportunities for first-time buyers and more financially constrained households.

This provides an excellent opportunity for those looking to invest in real estate because the pent-up demand for housing among a surging population waiting for lower interest rates means sales could explode when the rates are lower. The stance on when the housing market will take off is divisive. The Royal LePage, real estate firm, forecasts that the GTA will see a six percent rise in housing prices, and Ottawa will see an increase of 4.5 percent before the end of 2024. The REMAX real estate firm forecasts a drop of three percent for GTA and for Ottawa to experience a two percent drop.

The Next Step

There is no crystal ball to provide an answer to what the interest rate will be in late 2024 or the exact state of the housing market. If one is looking to buy a house or invest in real estate, a professional real estate agent can provide strategies and advice to help you navigate these challenging times. A licensed mortgage agent will help you with your financing needs, and though I don’t do residential home mortgages anymore, I highly recommend you work with a mortgage agent. They will find you a suitable mortgage for your life circumstances. As a mortgage agent focusing on land development and commercial mortgages, I can tell you that several developers are holding their projects back to get more favourable terms on their construction financing and ensure their buyers can close. We are all waiting for the rates to come down.

So, if you are not able to get into the housing market just yet, there are still things that you can do to help yourself when the market turns:

  • Save your money.
  • Pay off your credit cards. Your most expensive debt is your credit card debt, so you should focus on getting rid of it or at least reducing it to 50% of the limit you are allowed.
  • Don’t take on new debt. If you plan on buying a new home in the next year, you don’t want to take on additional debt, such as a new car, boat, or any other loan that will diminish your total debt ratio, which is one ratio used to determine how much mortgage you can afford.
  • Become financially literate. There are lots of podcasts and courses that talk about financial literacy.