What’s up, guys!? Welcome all HOMIE’s to The Truth About Real Estate Podcast. I'm your host and preferred real estate advisor, David Elliott coming to you from Toronto, Canada and I am always delivering you the truth about real estate.

Today is Episode 6 - Rates Down Means Values Up? Not So Fast. and we're going to look at a topic that's been heard across this country for months and months and months within the real estate world. And that is the anticipation of a market surge following the first rate drop from the Bank of Canada. But is this optimism warranted? Let's explore further.

Now that we've got that covered, let's jump into today's episode! Thanks for being here, and as always, happy listening!

So, if you haven’t been living under a rock, have any slight interest in real estate, and or have heard about rate drops for a while now, then you know that any realtor within an arms length of you has told you the all too famous (and stale) phrase: “when rates come down, values will shoot up.” You’ve heard it, I’ve heard it, we’ve all heard it.

And while lower interest rates can indeed have a significant impact on buyer behavior, there are several factors at play that suggest we may not see the expected outcome as immediately as many are predicting.

Let me give you an example of how I see this first hand. 

I had a recent experience with some clients, first-time homebuyers, and they came to me to get the ball rolling with helping them purchase ther own place. 

Despite securing a decent variable interest rate, they quickly realized that the steady and strong prices in our market were beyond their budget for what they wanted. It was a stark reminder that even the under average/attractive rates (in today’s landscape) it still sobered them up to the fact that they coundn’t afford this type of home.

And we’re talking entry level for many first time home buyers in the GTA.

This leads me into Reason 1 of 5 I have for you that have me thinking values aren’t going to go to the moon after the first rate cut coming up sometime this year:

Reason 1: High Prices

Now, let's dissect the first reason why I'm skeptical of an imminent market surge: high prices.

Across many markets, we've witnessed home prices skyrocketing to record highs, driven by a combination of factors such as low rates, limited inventory and high demand.

But what happens when prices become out of reach for the average buyer, regardless of how low interest rates may come down? What happens if there is too much inventory when rates come down a bit?

To better understand this phenomenon, let's take a closer look at the dynamics of supply and demand in Toronto.

Despite many believing rates will come down in June, buyers aren’t biting…..yet. Yet. Even after a drop in prices over the last year or so, prices are still up from their pre pandy days and have levelled off at unaffordable values.

Salaries have not gone up much on average so the prices on houses and condos still remains unaffordable for most. 

As I was looking at the numbers that just dropped, a couple of things stood out to me:

1. In April 2024, 7,114 home sales were reported, transactions were down 5.0% compared to the previous year, and

2. The 16,941 new listings in April were a 47.2% increase over last April. Less transactions, more inventory. Hmm.

Reason 2: Affordability Concerns

Building upon that point, affordability remains a pressing concern for many would-be homeowners.

While lower interest rates theoretically would make borrowing more affordable, they don't address the underlying issue of stagnant wages and increasing living costs.

Affordability is a multifaceted issue that goes beyond interest rates alone. While lower rates can certainly make homeownership more accessible for some buyers, they may not be sufficient to address broader affordability challenges, such as stagnant wage growth and rising living expenses. People have other focuses these days – mainly how they can feed their families.

Reason 3: Economic Uncertainty

Ah, yes, economic uncertainty—a topic that's been dominating headlines and influencing consumer behavior.

Despite the prospect of lower interest rates, uncertainties surrounding job security and future income prospects can significantly impact individuals' willingness to make long-term financial commitments such as purchasing a home.

Let's take a moment to analyze the current economic landscape and its potential implications for the real estate market.

According to many industry insiders and publications, Canadian economy may not see much growth in 2024 with the high level of household debt and the run-up in interest rates remaining in place.

Over the next year, Canadian consumers will likely be squeezed even more, which is why they expect the economy will struggle to grow over the next 12 months or so.

Reason 4: Tightened Lending Standards

As we navigate through these uncertain times, lenders are understandably adopting a more cautious approach, leading to tightened lending standards.

But what does this mean for prospective buyers, particularly those with less-than-perfect credit or limited financial resources?

Essentially, with lenders tightening their restrictions on loans, especially riskier loans, people will have a harder time qualifying for mortgages.

This could take a large number of buyers out of the buyer pool and contribute to a high amount of inventory sitting on the market for longer periods of time, simply because buyers won’t come out of the woodwork.

Which leads us to reason number 5:

[Transition Music]

Reason 5: Market Saturation

Finally, let's discuss market saturation and its role in shaping the trajectory of the real estate market.

In some regions, an oversupply of inventory coupled with tepid demand could act as a significant obstacle to rapid price appreciation, even in the face of lower interest rates.

As we draw this episode to a close, it's essential to acknowledge that while lower interest rates can indeed influence buyer behavior, they're just one piece of the puzzle.

The real estate market is inherently complex, influenced by various factors that extend beyond interest rates alone.

As I always say, if a Realtor is GUARANTEEING you anything in this world – RUN! No one knows what’s truly going to happen and I would advise people listening to those who don’t give you all scenarios and possible outcomes to re-evaluate who you’re working with.

That's all the time we have for today. Thanks so much for listening. Join us next time for another great discussion on The Truth About Real Estate Podcast.

BUT, before I let you go I always like to sign off on a positive note and give y’all something to think about –

“NO ONE KNOWS YOU BETTER THAN YOURSELF, WHICH IS WHY YOU NEED TO LISTEN TO YOUR INNER VOICE INSTEAD OF WHAT OTHERS THINK YOU SHOULD DO.”

Please don’t forget to like, comment and subscribe. And of course, share share share this episode with your people.  

I’m David Elliott, your preferred real estate advisor in Toronto Canada, thanks again and as always, Stay informed, stay empowered, and above all, stay true to yourself.

MAKE TODAY A GOOD DAY! See ya!