Elucidating the Effect of Inflation on the Toronto Real Estate Market

Wednesday, June 2022

From exorbitant prices at the grocery store and buying gas to paying rent and mortgages, inflation is felt by the common people with every purchase. There is hardly a household in Canada that hasn’t already felt the brunt of inflation on some aspects of their lives. However, it is completely understandable if you are unable to grasp what inflation means and how it can affect your real estate decisions. In this blog, we try to explain to you what inflation is and how it impacts the Toronto real estate market which has seen a lot of transition since the covid-19 pandemic set in.

What is inflation?

In economics 101, inflation is the general increase in prices of goods and services over time. As price increases, people are able to buy limited amount goods and services, thereby resulting in reduced purchasing power of money. In Canada, the inflation rate is measured by the Consumer Price Index (CPI). CPI measures changes in the price of general basket of goods, including food, shelter, clothing, health and hygiene, transportation, education and recreation.

What is causing the high inflation in Canada?

For the last 2 decades, Canada’s inflation rate has lingered between 1-3%. But recently Canadian inflation rate has jumped to new 30 year high of 6.8% in April 2022 and then in May it hit 7.7% - the highest in record since 1983.Economists had been expecting inflation rate to rise from 6.8% in April, but the numbers for May blew past those expectations as prices increased by 1.4% in the month of May alone. Seasonally adjusted, this makes May 2022 to have the biggest one-month jump in the inflation rate in 30 years. Inflation is expected to remain high throughout 2022.

It is not just Canada that is experiencing an accelerated inflation but the rest of the world as well and there is no single cause for inflation but a multitude of it. Some of the reasons for the prevailing high inflation are the excess printing of money during pandemic, disrupted flow of goods or supply chain due to covid lockdowns and the most recent Russia-Ukraine war. Another reason for inflation is reopening of pandemic hit sectors like restaurants, travel and air flights and people spending more in those areas.

How inflation is affecting the cost of living?

Since inflation reduces the value of money, the cost of living rises sharply. Within a year, every Canadian household has seen and felt the increase of prices of everyday commodities like gas, grocery, meat, clothes, furnishings as well as housing. Gas prices rose by 12% only in May and annually by 48% while grocery bills inflated by 9.7% over a year. Inflation is also seen in the pandemic hit sectors as prices have increased for restaurants, travel, and air flights.

What does it mean for Toronto Real Estate?

The Toronto real estate has seen record breaking prices in home sale during the pandemic period. With the low mortgage interest rate at that time, it fuelled affordability.

However, with high inflation and almost no change in wages, it means we now have less disposable income to spend on real estate. This is likely to discourage first time home buyers and those looking to upgrade to embark on buying or selling a home. On the other hand, raising interest rates which is a key tool in controlling

On the other hand, raising interest rates which is a key tool in controlling inflation will mean home buyers will qualify for lower mortgages and pay higher mortgages. Although inflation can lead to higher asset prices, the increase in mortgage

Although inflation can lead to higher asset prices, the increase in mortgage rate puts downward pressure on demand for real estate as debt becomes more expensive. As such we are already seeing a trend towards a cooling market with fewer showings, longer days on market, and fewer bidding wars. According to TRREB, in May, GTA home sales declined by 38.8% in a year and 9% over a month. Although average selling price saw a 9.4% increase in a year, it dropped by 9.1% since February. The city of Toronto also saw a 10.4% annual increase in sell price but a dip of 0.74% since April, and sales too declined annually by 34.6% and monthly by 11.4%.

The current rate tightening cycle has changed market dynamics, with many potential home buyers putting their purchase on hold. This has led to more balance in the market, providing buyers with more negotiating power”, spoke Jason Mercer, TRREB Chief Market Analyst.

The sales-to-new listings ratio, which is an important tool in determining who has more power in the real estate market, was at 65.1% in May. While still indicating a seller’s market, it’s a drop from April’s 68% and January’s 72.9%. The ratio was slightly lower in Toronto at 63.2%. Anything higher than 60% indicates a seller’s market, while a ratio of 40% to 60% is considered balanced.