GTA home prices rise 3.5% in October year over year

Home prices increased in the Greater Toronto Area (GTA) in the month of October, driven in part by condo sales.

The average sale price for the month was up 3.5% year over year, reaching $807,340, reports the Toronto Real Estate Board (TREB).

Along with condo sales, price growth was driven by sales in “higher-density low-rise market segments,” says TREB in a release.

It adds that the MLS Home Price Index Composite Benchmark was up 2.6% compared to October 2017.

The GTA also saw a 6% increase in home sales in October compared to the same month last year.

While mortgage stress tests introduced at the beginning of the year, along with higher borrowing costs, have kept sales below 2016’s record pace, a strong economy and steady population growth are expected to support housing demand into 2019, says Garry Bhaura, TREB president, in the release.

Further, new sales listings were down 2.7% year over year in October, suggesting a tighter housing market going forward. In fact, annual sales growth has outstripped annual growth in new listings for the last five months.

To address supply concerns, “all levels of government need to concentrate on policies that could remove impediments to a better-supplied housing market, including facilitating the development of a broader array of medium-density housing choices,” says Jason Mercer, TREB’s director of market analysis, in the release.

Variable versus fixed-rate mortgages

In addition to rising home prices, rising mortgage rates will affect clients looking to buy homes.

“With interest rates on the rise and debt-laden households sensitive to higher borrowing costs, homeowners have even more reason to ensure they make the right choice,” says BMO senior economist Sal Guatieri in a report.

Guatieri sheds light on whether clients should opt for variable or fixed-rate mortgages in light of further rate hikes by the Bank of Canada. In October the central bank raised its key rate for the fifth time in just over a year, affecting banks’ prime rates.

Two years ago, the five-year fixed mortgage rate was about 2.75% or less, notes Guatieri, while it’s closer to 3.75% now. (On a $500,000 home financed with 5% down and a 25-year amortization period, the higher rate means an extra $250 in monthly mortgage payments or $3,000 per year, he says.)

Assuming a variable rate moves one-for-one with forecasted BoC policy rates, Guatieri says 3.0% is the variable rate that would leave a client no better or worse off than if they locked in for five years at 3.75%.

Why? Guatieri’s tip is based on BMO’s forecast for central bank rate hikes through March 2021.

“Assuming the Bank of Canada does what we expect it to do, 75 basis points would appear to be the magic number when deciding between a floating and fixed-rate mortgage for five years,” says Guatieri in the report. “If you can’t get a variable rate that much lower than the fixed rate, it might make sense to lock in.”

He adds, however, that borrowers have more options than fixed versus variable.

“Locking in for a shorter duration of two or three years instead of five could pay off if the economy hits a rough patch in 2021 in response to past rate increase,” he says. “The borrower could then take advantage of subsequent lower interest rates to refinance.”

For more details, read the BMO report.