Trying to time your entry into the homebuying market is a bit like trying to hop onto a merry-go-round that’s spinning just a tad too fast. You want to get on without getting dizzy, or worse, flung into a nearby bush. With mortgage rates soaring, it’s no surprise that many would-be buyers are hanging back, waiting for that merry-go-round to slow down just enough to make their jump into the market less of a leap and more of a confident stride.  

This hesitancy has led to a noticeable dip in real estate activity. However, the overall hunger for home ownership hasn’t waned. It’s just taking a bit of a breather until mortgage rates start to come down. There are as many, if not more people dreaming of their perfect home as there were before. Yet many of them are holding off on their home search in anticipation of lower mortgage rates to come.  

What many don’t realize is that everyone else is playing this exact same game. 

In theory, it seems logical, but in practice, it could end up being a costly move.  

People sometimes get so overly caught up thinking about the mortgage rate that they forget about what is most important. Keeping the most money in their pocket at the end of the day. Yes, a lower mortgage rate will result in paying less interest over the term. But if you’re considering purchasing a new home, you also need to think about what’s going to happen with the market once rates start to fall.  

 

The Impact of Falling Mortgage Rates on the Real Estate Market  

The consensus is that mortgage rates will drop over the next few years. It’s only a matter of time. The buyers currently sitting on the fence can then be expected to return to the market in full force. The influx in demand will result in the market going ballistic once again, rapidly driving up home values.  

Reflecting on recent history, we saw a similar pattern that began in the early stages of the pandemic from March to May 2020. In my blog from May of that year, I predicted that there was a window of opportunity to purchase real estate as it was just a matter of time before the market took off again. Well, here we are again.  

Let’s consider the Greater Toronto Area as an example. In February 2020, just before the pandemic, the average property price (among all types) was $846,045*. By May, this figure had dipped by 5.05% to $803,339.  

But with rapidly falling mortgage rates, the demand for housing increased with a vengeance, bringing the average property price to $887,402 by December 2020. An increase of 10.46% from where it was in May.  

2021 began with a month-over-month increase of 5.96%, bringing the average price to $940,279 in January, which then escalated to $1,121,601 by December. This marks a substantial 19.28% rise, translating into an increase of $181,322 in just a single year. That being said, 2021 was not your typical year. But I wouldn’t expect 2024 or 2025 to be typical years either.  

By the time the market reached its peak in February, 2022, property values in the GTA rose by a whopping 58% since May 2020, with an average home price of $1,269,306. That’s a climb of $465,967 in less than two years.  

Now that I’ve outlined how fast property values can rise in a hot market, let’s compare this with the effect of falling mortgage rates on your wallet.  

 

How Much Will You Save When Mortgage Rates are Lower?  

Over three years, a 2% rate drop equates to saving roughly $6,000 for every $100,000 borrowed. I’m using three years as this is currently the most popular term length. That’s $30,000 on a $500,000 mortgage, giving you an ending balance that is roughly 6% lower at the end of the three year term.  

This is just an example. We don’t know exactly how much rates will drop, but it’s likely that it will be greater than 2%. We’ll see. But even if they dropped 4%, that’s $60,000 over 3 years.  

Getting a cheaper mortgage can be as tempting as a double-chocolate sundae, but it’s not so sweet if it means shelling out an additional $200,000 more for the purchase of the new home.   

Now that you see how quickly home values can increase, are you still interested in waiting for rates to drop so you can pick up that $30,000 savings you’ll see from a lower mortgage rate? Everybody’s mortgage amount will be a bit different of course. But it’s all relative and the same logic applies.  

This is where you need to consider how much more you could end up paying for your new home when the market rebounds.  

For more information on the correlation of home values to mortgage rates, I would check out my blog from November 2022 on the contrast between higher rates and lower home prices.  

 

How Much Have Home Values Dropped from Their Peak?  

Now that we’ve established how much you can expect to save from falling rates and the extent of how rapidly real estate prices can rise, let’s look at how much they have fallen to date.   

In my blog from May 5, 2021, I took an educated guess that the market would correct in 2022. From the peak of the market in February 2022 to October 2023, the average real estate value in the GTA dropped from $1,269,306 to $1,022,062. That’s a dip of $247,244, or 19.48%.  

Given that home values have dropped to this extent, and how far mortgage rates could potentially fall, it appears that we’re now in the midst of the perfect storm of home buying opportunity.  

Real estate values will eventually rise back up above the Feb 2022 peak and beyond. It’s just a matter of when it happens. I would strongly recommend getting into the market ahead of the expected buying frenzy to come.  

 

How Long will it Take You to Buy When the Market Heats Up?  

We’ve explored the rapid increase in home values during a hot market, the potential savings from dropping mortgage rates, and the current dip in the market. Now, it’s time to consider how long it might take for your offer to get the nod once the anticipated housing market madness kicks off. 

As anyone who tried to purchase a home from 2012 to early 2022 will tell you, the home shopping process was a frustrating one (with one exception being a short window in 2017). You think you found the perfect home, only to find out there are 20 other competing offers, leaving you out bid on property after property. You keep trying, but values just keep climbing higher and higher. Before you know it, homes in your price range are selling for hundreds of thousands more. Should you find yourself in this situation, here are 7 tips to get your offer accepted in a hot real estate market.  

I’ve seen it take many of my clients as much as two years before finally getting their offer accepted. Sometimes even longer. It personally took me 2.5 years. This could result in paying hundreds of thousands more for a similar home.  

Remember what I said happened with values the last time they dipped right before rates fell? The average property price increased by 58% or $465,000 in only 1 year 9 months.  

This is why it’s advantageous to buy before rates begin to tumble. To get ahead of the impending market frenzy. If you manage to negotiate a longer closing period, there is a solid chance that rates will be lower by then. The lowest rates can often be held for up to 120 days. We’ll continue monitoring rates for you…. all the way up to just before your closing date. When rates drop, we’re on it! We’ll work to get your rate lowered, even if you have already signed your mortgage commitment. It’s all part of the service we provide, as we’re committed to getting you the lowest mortgage rate possible.  

While it’s true that rates might fall even more, remember that the more they drop, the quicker home prices will rise, which will ultimately result in you paying more for the new home…and the difference can be substantial.  

A good analogy that is often used with real estate is you date your mortgage, but you marry your house. Much like in relationships, dating represents a temporary phase. On the other hand, marriage symbolizes a long-term commitment….. or at least, that’s the plan at the time!  

 

Is This the Start of the Big Mortgage Rate Drop?  

If our economy continues to weaken, inflation will continue to fall which is exactly what’s needed for mortgage rates to continue dropping.  

As of now, the big six banks are forecasting for the Bank of Canada to start cutting their rate in the 2nd or 3rd quarter of 2024 (depending on the bank). But as I mentioned in last week’s blog on mortgage rates dropping, fixed rates will not wait for the Bank of Canada to make a move. All it takes is positive news and bond yields will react by dropping. If bond yields continue to fall, we can expect them to bring fixed mortgage rates along for the ride.  

That’s the view of the big six banks, but the Bank of Canada is taking a more cautious stance, indicating they won’t lower their rate until their 2.00% inflation target is met, a goal they anticipate achieving by the end of 2025. However, many economists believe this timeline is overly conservative. The Bank’s approach is likely influenced by their desire to rebuild credibility after their early 2022 forecast errors. By setting expectations for later rate cuts, they position themselves to potentially deliver good news ahead of schedule, rather than repeating past mistakes. Furthermore, the Bank is aware that too much optimism could cause bond yields to spike, inadvertently reducing fixed rates and igniting a purchasing frenzy, which could in turn fuel inflation – a scenario they are keen to avoid. 

If the big six banks are correct, then it’s likely that this is the start of the big drop, and fixed mortgage rates will continue to fall. Those who have been sitting on the sidelines can be expected to re-enter the market in droves, creating another frenzy of fierce buyer competition.  

This could be just around the corner.  

Sure, you could wait for rates to drop before you buy. But as this is what so many others are doing, you could end up paying significantly more for the home… and you likely will.  

 

Conclusion  

Mortgage rates will fall, and when they do, it’s going to become increasingly difficult and more expensive to get into the housing market. Aim to get in ahead of the game. If you buy when mortgage rates are higher but values are lower, then you’d be well positioned to maximize your savings over time. But if you wait for rates to fall, then you could end up paying significantly more for the price of the home… just so you can get a lower rate with far less savings.  

It’s impossible to predict the perfect timing, just as it can be impossible to buy a stock when it’s at it’s all time low. But if rates continue to fall, then we can expect the real estate market to heat up quickly. You’ll want to dive into the market before the impending chaos unfolds. The window for purchasing real estate has opened.  

 

 

*The real estate values used are an average of all property types in the GTA, detached, semi-detached, town homes and condos.   Source:  Toronto Real Estate Board.