The Impact of Interest Rate Increases on Ontario’s Housing Market

The series of interest rate increases that began in March 2022 has caused a shockwave in the Canadian housing market as housing transactions and prices have notably decreased, with some regions being more significantly impacted than others. In this edition of the Market Insights Report, we will dive deeper into the data and share some discernible home purchasing and mortgage trends observed since the rate increases. We will examine whether the interest rate hikes impacted premium and moderate home sales differently, affected property ownership tenures at the time of sale and if these increases have affected property financing decisions amongst Ontarians.  

In this report, we will examine the impact of interest rate increases on properties of differing values, amongst other analytical dimensions. We will classify properties as either premium or moderate based on the sale value of the home. Premium homes are those in the top 25% of sales values for a given calendar year, the remaining are considered moderate.  

In the Greater Toronto Area (GTA, Figure 1): 

• A premium non-condo home value began at the $1.02m mark in 2018, and by 2022, this benchmark had grown to $1.58m, representing a compound annual growth rate (CAGR) of 12%.  By Q1 2023, the base price for a premium non-condo has dropped to $1.42m. 
• A premium condo home value started at $0.57m in 2018 and by 2022 it had risen to $0.80m, which is a CAGR of 9%. By Q1 2023, the base price for a premium condo has dropped to $0.74m.  

Outside the GTA and Ottawa (Figure 2): 

• A premium non-condo home value started at $0.48m in 2018, and by 2022, it has grown to $0.85m, a CAGR of 15%.  By Q1 2023, the base price of a premium non-condo dropped down to $0.76m.  

• A premium condo home value started at $0.38m in 2018, and grew to $0.63m in 2022, which represents a CAGR of 14%.  

Note: The data set in Figure 1 and Figure 2 excludes outliers which are defined as those located more than 1.5 times the interquartile range from the box.

In the GTA specifically, sales of properties within one year of ownership grew from 20% of total sales transactions between 2018 and 2021 to 28.7% in Q4 2022, before dropping slightly down to 24.7% in Q1 2023 (Figure 10). The same trend was not observed in the rest of Ontario. 

In Ontario, the ratio of property purchases with and without a mortgage at the time of purchase has been stable, at 80% and 20%, respectively. 

However, the ratio varies between different buyer segments*, and different behaviours can be observed for each buyer segment during the pandemic and as interest rates rose in 2022 (Figure 12): 

• Movers – one of the smallest home purchasing groups in Ontario. Historically, only approximately 13% of purchases were made without a mortgage, but this increased through 2022 to reach 18% by Q1 2023.
• First-time homebuyers – consistently the top home purchasing group in Ontario. As expected, 95% of homes purchased are financed by a mortgage, with no change during the 2022 rate hikes. 
• Multi-property owners – emerging as the other major home purchasing group in Ontario since the pandemic. This group can be observed to have higher levels of mortgage financing prior to the rate hikes, but notably reduced as interest rates increased. 
• Other – all other home purchasers, likely comprising of newcomers to Ontario or Canada or those with an extended absence in the Ontario housing market. Historically, a stable 25% of these homebuyers purchase without a mortgage, but this increased to 30% by Q1 2023. 

In summary, it appears that, some buyers, especially those in the multi-property owner, other and mover segments, have access to alternative funding for home purchases in a high interest rate environment for which they would have sought traditional mortgage financing for if money had been cheap.   

Furthermore, for those who required mortgage financing at the time of purchase, there were no discernible behaviour changes amongst home buyers in terms of where they source financing before and after the interest rate hikes of 2022. 

*See below for definitions of buyer segments.

As the Ontario housing market evolved through the pandemic and adjusted to the series of rate hikes in 2022, and continues to speculate on further Bank of Canada actions, some discernible trends that we have observed to date include:

• The premium property segment grew significantly in Ontario to almost equal market share with the moderate segment during the peak of the pandemic housing rush but was also more susceptible to the impacts of the rate hikes. 
• The non-urban areas grew more in value than the urban areas. It remains to be seen whether this value will start to decline as those who fled to non-urban areas during the pandemic return to city life. 
• There is a notable increase in homeowners selling within one year of ownership in recent quarters.  
• In a high interest rate environment, there is a greater proportion of buyers purchasing without a mortgage, especially by multi-property owners and other buyers. 

We will continue to monitor these and other trends to bring you new and thoughtful insights on the Ontario housing market in future editions of the Market Insight Report. 

• Movers: Buyers that moved from one property in Ontario to another. They have sold their sole, existing property and purchased another property within a period of time.
• Multi-property owners: Property purchases by buyers who, at the time of the purchase, also own other properties in Ontario. The properties purchased by this group of buyers could represent any combination of principal residence, investment property or recreation property.
• First-time homebuyers: Property purchases by buyers who claimed the Ontario land transfer tax exemption for first-time homebuyers. To qualify for this exemption, the buyer must not have purchased property anywhere in the world.
• Other: All other buyers. This could include buyers from outside of Ontario or Canada or re-entry into the property market after an extended absence.