Bank of Canada interest rate hike adds pressure to tight rental market

Sale prices down, rent going up

Even with inflation decreasing from 7% in August and 7.6% in July, rent is still increasing.

Vancouver’s one-bedroom apartments averaged the highest in the nation at $2,590, representing a 0.6% monthly increase in September and 20.2% year-over-year. Toronto ranked second with one-bedroom apartments renting for $2,474, marking a 6.3% monthly increase and 27.5% year-over-year.

Third came Burnaby — third largest city in British Columbia — with a one-bedroom apartment averaging $2,292.

“For me, personally, I think landlords are getting out of control with the prices they're asking,” says Michael Sistilli, business development and mortgage agent at UNION Capital Lending.

Sistilli believes some landlords are asking for higher monthly payments in order to cover their hefty rising mortgages.

In one instance, he witnessed a detached home with a two-car garage in Vaughan, Ont. leasing for more than $4,000 a month.

“I've never seen a lease be the same amount as a mortgage payment,” he added. “They're trying to break even. But unfortunately, in this market, it's very hard to break even, especially for condos, when factoring costs such as maintenance fees.”

Canadians bid farewell to lower interest rates in March 2022, when the Bank of Canada increased overnight rates for the first time in more than two years. It didn’t take long for mortgage rates to rise accordingly. According to Statistics Canada, the average conventional mortgage lending rate for loans with five-year terms was 3.28% in 2021, but now it supasses 5%.

Back in the spring — when rates were at 2.75% or even 3% — there was “discussion” when buying a home, said Sistilli. Following the more recent July and September rate hikes, more would-be homebuyers have been priced out of the market.

“You're gonna know right off the bat, whether or not you can afford that,” Sistilli said. “So another interest rate hike is not going to change the fact that you couldn't afford it anyways.”

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Long time coming

For Geordie Dent, executive director of the Federation of Metro Tenants' Associations, renters in Toronto are experiencing the “perfect storm of bad conditions.”

This storm itself didn’t arrive just yesterday. Rather, it's built up from what’s happening before.

“We've had very low amounts of supply built in terms of rental housing for almost 30 years. And you've had wild amounts of speculative investment pouring into the housing market for years, the raising of interest rates has largely stopped the latter,” Dent added.

The lack of supply and the rate increases make it less afforable to buy, so many would-be buyers are continuing to rent, even as housing prices decline.

Last month, Toronto home prices fell for a fifth straight month, considered the longest fall since 2017.

An August report by TD Bank predicts average home prices across the country will fall by 20% to 25% from the peak of the housing boom from Q1 this year to Q1 in 2023.

This combination of factors has made real estate investors hold on to their assets and opt to rent to stop their losses.

“So you're seeing housing prices go down, but rents then go up,” Dent said.

Sellers have equity and not liquidity

Daniel Foch, a broker at the Foch Family Real Estate, believes that the strong rental market is an option for landlords and investors who are considering selling.

“Sellers at the moment have equity, but not liquidity,” says Foch, who also co-hosts “The Canadian Real Estate Investor” podcast.

“The market is not moving much and properties are taking longer to sell,” he added.

“Most sellers aren't worried at the moment, but the rental market is strong, so we are seeing an increase in rental listings, as sellers who can afford to are capitalizing on the rental income, rather than liquidating the asset.”

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Trigger rates going off across Canada

But even investors who opt to rent may be faced with additional costs as they approach or hit their trigger rates, as a result of the latest rate increase.

For homeowners with a fixed-rate mortgage, the amount of interest they pay remains the same throughout their term, no matter the fluctuation in interest rates.

Data from the Canada Mortgage and Housing Corporation (CMHC) showed over half of mortgages taken out earlier this year were variable-rate products. With a variable-rate mortgage, the interest that homeowners pay is tied to the prime rate. An increase in the prime rate leads to an increase in the amount of interest homeowners pay. This makes sense since people wanted to capitalize on lower interest rates earlier in 2022.

The trigger rate comes into play when the amount of interest exceeds the total payments, which then leads to an increase in the principle that a homeowner is charged.

Ron Butler, a mortgage broker at Butler Mortgage, says trigger rates are going to be a problem.

“Because if this increase is 75 basis points, there will be trigger rates going off all across Canada,” Butler said, days prior to the bank increasing the interest rate to 3.75%. While the Bank of Canada opted for a 50 basis point increase, that could still trigger a rate increase for investors, who may choose to absorb the additional costs, or pass it on to renters if they can.