Wave of mortgage renewals drives owners to list homes, analysts say

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With many Canadian homeowners facing a sharp rise in mortgage payments, many of them have decided to bail, resulting in the highest number of Toronto housing units for sale in more than a decade and signaling a big drop in prices in the coming months.

In Toronto, a city where two-thirds of the country’s condominiums are sold, considered a bellwether for other big metropolitan areas, inventories have pushed past highs reached 10 years ago, data showed. At the same time, sales have lagged.

Rising inventories with anemic sales show a high degree of stress in Canada’s biggest property market, real estate consultants said. It indicates either a string of defaults or a price correction is in the offing.

Fueling the surge in available properties are homeowners and investors who bought houses and apartments five years ago at record-low mortgage rates, aiming to grab a piece of Toronto’s lucrative rental market.

But those mortgages are now coming up for renewal in an interest rate environment starkly different than it was five years ago. Mortgage rates are sharply higher, although the Bank of Canada has recently started to guide them down.

In Canada, mortgages are typically for 25 years and renewed every three or five years, in contrast to the United States, where homeowners can enjoy a flat rate for the entire life of a 15-year or 30-year mortgage.

Under current rates, many homeowners would have their mortgage payments double, according to a calculation by ratehub.ca, a website that compares mortgage offerings.

Next year, roughly C$300 billion ($219.33 billion) of mortgages at chartered banks will come up for renewal.

“Some of them are investors who now just want to walk away from their units because they can’t afford it,” said Carl Gomez, chief economist at CoStar Group, a U.S.-based real estate information provider.

At the same time, many are also reluctant to lower asking prices and book losses on their investment, he said, at least for now.

“There’s just limited willingness to lose money,” said Daniel Foch, director of economic research at RARE Real Estate. “It seems like nobody has really adjusted their expectations to a market in which they aren’t going to make a profit,” he said.

The trend is especially pronounced in the condominium market, where inventory is at a historic high, said John Lusink, president of Right at Home Realty, Canada’s largest independent housing brokerage firm.

The current supply would typically take more than five months to sell.

“It is a buyers’ market with no buyers,” he said.

According to Toronto Regional Real Estate Board, a group representing 70,000 brokers and salespeople in the Toronto area, listings have risen by almost 25 per cent in the first three months of 2024 from the same period a year ago. Meanwhile sales have edged up by only 5.3 per cent.

The Bank of Canada’s next rate decision comes on July 24 with a majority of economists expecting another cut of 25 basis points in the overnight rate. Last month, it trimmed the benchmark rate to 4.75 per cent from five per cent for the first time in four years.

But economists say that even as the central bank’s rate comes down by 100 basis points, it would have a muted impact on mortgage rates coming up for renewal. Five-year fixed rates are instead linked to long-term bond yields, which might hover in the three per cent to four per cent range.

“Something’s got to give,” Lusink said, forecasting that Toronto condo prices might drop by 10 per cent by end of the year.