Rising Interest Rates Squeeze Toronto Condo Affordability

Interest Rate Hikes Erode Buyer Affordability and Mortgage Access

Toronto’s condo market is feeling the full brunt of rising interest rates. Over the past two years, the Bank of Canada’s benchmark rate rocketed from near 0% to around 5%, its highest level in over two decades . As a result, mortgage rates have more than doubled from their pandemic lows – five-year fixed rates climbed past the 6% mark in late 2023, roughly triple their level in 2021 . This surge in borrowing costs has dramatically reduced how much home buyers can afford and qualify for. Would-be purchasers find that the same monthly payment now yields a much smaller mortgage, pricing many out of the market or into cheaper segments.

Mortgage approval rates have slumped alongside soaring costs. Canada saw new mortgage originations plummet by 42% in early 2023 compared to a year prior, hitting their lowest level since 2014 . Strict federal stress tests – which require borrowers to qualify at interest rates ~2 percentage points above their contract rate – have become a higher hurdle as rates rise. Today’s buyers must prove they can handle payments at roughly 7–8%, a scenario few average-income households can comfortably meet. It now takes an astonishing 75% of a typical Toronto household’s income to cover ownership costs on an average home, far above the one-third benchmark of affordability . RBC reports that its housing affordability index for Toronto hit record-worst levels in late 2023, after the dual impact of pandemic price run-ups and rate spikes “considerably raised the bar to homeownership” . While there has been a slight improvement as rates stabilize and incomes inch up, affordability remains “close to worst-ever levels” , keeping many first-time buyers on the sidelines.

One immediate effect is a sharp pullback in demand for condos. CMHC notes that both investors and end-user buyers have “significantly reduced their purchases of new condominiums because of the impact of higher interest rates.” This drop in pre-construction sales has left many developers unable to meet the required presales to secure financing . In the resale market, wary buyers are delaying purchases or downsizing their ambitions. “Higher interest rates…allow buyers to be choosier” in the condo market, observes one Toronto realtor, given the glut of options now available . Even those who can obtain financing are often approved for smaller loans, forcing them into lower price tiers. The result is a markedly more “buyer’s market” for Toronto condos than seen in years, with sales volumes hovering near 20-year lows .

Sellers Adjust Pricing and Strategies in a High-Rate Market

Faced with this tougher financing environment for buyers, Toronto condo sellers are being forced to adjust their expectations and tactics. The era of frenzied bidding wars is long gone – today, listings are sitting longer and price cuts are increasingly common. In some dramatic cases, sellers are accepting losses on properties purchased at the peak. For example, a high-rise Toronto condo recently sold for 21% less than its 2021 purchase price (a $320,000 loss), illustrating how much the market has turned in favor of buyers . The listing agent noted the unit had faced multiple failed sale attempts and intense competition from similar condos before finally selling in a “buyer’s market” environment .

Overall, the supply of condos for sale has surged as owners who are investors or under financial strain look to exit. In January 2025, new condo listings in Toronto hit an all-time high, with active listings more than doubling the 10-year average . Many of these sellers are investors squeezed by negative cash flows – over half of Toronto condo investors with units completed last year are losing money each month at current interest rates, according to a joint report by Urbanation and CIBC . Facing higher mortgage payments than rental income can cover, these investors are “cashing out,” adding even more downward pressure on prices . The flood of resale supply means sellers must price competitively or risk getting overlooked. Indeed, condo resale prices have flattened or declined slightly – the average Toronto condo price (~$700,000) is down about 1% from a year ago , even as the broader market saw modest gains.

Not all sellers are slashing prices outright, however. Stubbornly high replacement costs and earlier expectations of lofty returns have made some developers reluctant to cut nominal prices on new units. Instead, many developers are offering incentives – from cash rebates to free upgrades – to entice buyers while trying to hold base prices firm . This strategy reflects a standoff: “Prices are too high for buyers to jump in thanks to higher interest rates, but sellers don’t want to lower prices”, wrote CIBC economist Benjamin Tal, noting that new condo sales in the GTA have now plunged to their lowest level since the late 1990s . With few transactions occurring, the condo market has in effect reached a stalemate. “The math doesn’t make economic sense” for either buyers or developers at current prices and interest rates, Tal explains – a recipe for an extended slowdown until the gap is closed one way or another .

Homeowners who aren’t forced to sell are opting to wait out the storm if they can. Realtors report that many investor-owners are choosing to rent out units or simply hold them vacant rather than sell at today’s depressed prices . “If you have a hard-earned asset in Toronto, hold on… Rates are going to come down,” advises one real estate agent to any condo owner considering selling into this weak market . That patience is keeping some inventory off the market, but with thousands of new condos set to complete in 2024-2025 , the pressure on prices may persist. Toronto is expecting a record 29,000 new condo completions in 2025, a wave of supply that will test the market’s capacity to absorb units amid higher financing costs . Unless borrowing costs ease significantly, sellers will likely remain in a tough spot where only sharpened prices or creative incentives will move their condos.

Historical Context: How Does This Cycle Compare?

The current squeeze on affordability and sales echoes previous interest rate shock episodes – though with some key differences. The last time rates rose so sharply was in the late 1980s, which triggered a deep housing downturn in the early 1990s. Back then, the Bank of Canada’s benchmark rate soared above 13%, and Toronto home prices subsequently collapsed by an inflation-adjusted 38% over a seven-year slump . Many have drawn parallels between that era and today: “Toronto’s condo market is facing its biggest test since the 1990s recession,” according to the Financial Post . Indeed, by some measures (such as condo pre-sales and investor losses), conditions now “are deteriorating to levels not seen in decades.”

However, there is hope that the worst of the 90s crash can be avoided. Unlike the early 90s, Canada’s economy has thus far skirted a severe recession – unemployment remains relatively low and immigration-fueled population growth is strong, especially in Toronto. These factors support underlying housing demand and create a floor under prices. TD Economics also notes that interest rate levels, while high, are expected to fall sooner and faster than in the 90s, when inflation stayed stubborn. Already, the Bank of Canada has begun easing rates from their 2023 peak, cutting the overnight rate to 4.75% by the end of 2024 . If inflation continues to cool, further gradual rate relief is anticipated into 2025. This should eventually help improve affordability and stimulate demand, preventing an outright free-fall in prices. “Even if a ’90s-style downturn is avoided, elevated rates will likely push average home prices in Ontario lower over the next several months,” one TD report cautions . In other words, some additional price softening may occur as the market searches for equilibrium, but a prolonged crash akin to the “lost decade” of the 1990s isn’t the base-case scenario for most analysts.

Another contrast is the role of investors and banks. During earlier cycles, speculative investors were less prominent in the condo sector than they are today. In this cycle, investor-owned condos have been a major swing factor – amplifying the boom, and now amplifying the weakness as many look to exit under financial duress. Lenders, for their part, are adapting tactics to avoid fire sales. Banks have reportedly used “blanket appraisals” for some new condo projects – essentially valuing multiple units at pre-sale contract prices rather than current market value – to help recent buyers secure financing without massive additional down payments . This arguably props up the market (preventing a cascade of closing failures and distress sales), something not seen in past downturns. Such measures may be averting a sharper correction in the short term, but they also underscore how unusual and stretched the current market is.

Finally, it’s worth noting that Toronto’s housing affordability challenge was extreme even before this rate tightening cycle. International comparisons by The Economist show Canada’s housing market as one of the most “overvalued”in the world on price-to-rent and price-to-income metrics . In effect, years of rock-bottom rates and limited housing supply drove prices to heights that were unsustainable relative to fundamentals. The 2022–2023 rate hikes have brought that issue to a head. As Bank of Canada Governor Tiff Macklem remarked, “Housing affordability is a significant problem in Canada – but not one that can be fixed by raising or lowering interest rates” alone . In his view, long-term solutions lie in boosting housing supply; otherwise, whenever rates do eventually come back down, pent-up demand could simply reignite price pressures . This historical and global context suggests that while the current rate-induced cooldown is painful, it may also be a much-needed rebalancing for a market that had become severely overheated.

Outlook and Takeaways for Buyers, Sellers and Investors

For buyers: Today’s market presents challenges but also opportunities. Affordability is stretched – buyers should carefully reassess their budgets under current rates and get pre-approved to understand their limits. The stress testbuffer means if you can qualify now, you’ve built in a safety margin. Leverage the slower market to negotiate; with Toronto condo months-of-inventory around 5–6 (signaling balanced-to-buyer’s conditions), you can insist on conditions like financing and home inspection. It may be prudent to seek rate locks or choose shorter-term mortgages if you expect rates to fall, but also ensure you could handle payments even if rates stay elevated for longer than expected. Above all, focus on value and fundamentals: units in good locations, with solid building financials and reasonable condo fees. Such properties will hold up better in a soft market. If you’re a first-time buyer who’s been priced out, keep saving and stay engaged – a window of improved affordability could open if prices dip a bit more and rate relief kicks in later in 2025 . Patience is key, but be ready to act when the right opportunity arises.

For sellers: Price realistically and strategically. In this high-rate environment, buyers are extremely payment-sensitive – a listing priced even 5% too high can languish with little activity. Look closely at recent comparable sales (not last year’s peak) and be willing to price at or slightly below market to attract attention. In lieu of outright price cuts, you might consider offering incentives: for example, covering a few months of maintenance fees, or if feasible, offering to buy down the buyer’s mortgage rate for a couple of years. Such perks can expand the pool of eligible buyers without visibly reducing your asking price. Ensure your property shows its best: with so much inventory on the market , small improvements (fresh paint, staging, decluttering) can differentiate your unit. Be prepared for a longer sales cycle – condos are taking significantly longer to sell on average than in the frenetic pandemic market. If you have the financial flexibility, consider holding off on selling until conditions improve. As one agent advised, it may pay to “hold on” if possible, since the interest-rate climate is expected to gradually improve going forward . However, if carrying costs are straining you (especially for investors with negative cash flow), it could be better to sell sooner rather than later, before potentially more new supply comes on line. Every seller’s situation is different, but all should stay abreast of market trends – the spring 2025 season and any rate moves will be telling signals for what to do next.

For investors: The calculus for investors has changed markedly. Cash flow now trumps speculative gains. With borrowing costs so high, any new investment purchase should be stress-tested for a scenario of prolonged higher interest rates. It’s crucial to run the numbers: at current rates, many Toronto condos don’t generate enough rent to cover mortgage, condo fees, and taxes – a situation an Urbanation study found true for over 80% of leveraged investors . If you’re a current investor, audit your portfolio. For properties deep in the red each month, do you have sufficient reserves to weather this period? If not, you may need to refinance (if possible) at a lower rate or consider selling underperforming units to protect your equity. On the flip side, a subdued market can offer buying opportunities for those with a long-term horizon. Prices have softened and desperate sellers exist – if you find a quality property at a discount that can at least break even on today’s rents (or if you’re able to buy in cash), you could set yourself up for solid gains when the market eventually recovers. Just be mindful of upcoming supply – with record condo completions slated through 2025 , rents may soften and resale values could stay under pressure in the near term . Focus on units with enduring rental appeal (good locations near transit, low vacancy areas, etc.). Finally, stay informed on policy changes. Any government moves on immigration, rental policies, or mortgage regulations (such as extended amortizations for investors) could tilt the investment math. In short, today’s higher-rate era calls for more caution and a return to fundamentals for investors – but for those who navigate it wisely, it could lay the groundwork for healthy returns once interest rates and the market normalize.

Bottom Line: Toronto’s condo affordability has been hit hard by the fastest interest-rate climb in decades. Mortgage approvals are tougher to secure, and both buyers and sellers face a far more cautious market. We are seeing a reset of expectations – prices adjusting down slightly and strategies evolving – as the city works through an affordability reckoning. Compared to past cycles, the hope is that proactive policy (rate cuts in 2024–25, efforts to boost housing supply) will engineer a softer landing this time around. Still, the coming months will test the market’s resilience. All stakeholders should brace for continued choppiness but also be on the lookout for strategic opportunities. Rising rates have undeniably tightened the screws on Toronto’s condo market affordability, but they have also reintroduced a dose of realism that, in the long run, could set the stage for a more sustainable market recovery . The key will be navigating the current high-rate storm with prudence – and positioning oneself for when the clouds (and rates) eventually begin to part.

Sources: Recent analyses and data from The Globe and Mail, Toronto Star, Canada Mortgage and Housing Corp (CMHC), the Bank of Canada, Financial Post, Financial Times, The Economist and Wall Street Journal, among others, informed this report. Key insights were drawn from RBC Economics on housing affordability , a CMHC housing supply report , CIBC and Urbanation’s condo market study , statements by the Bank of Canada Governor , and market statistics from local real estate research firms . These sources paint a consistent picture: higher interest rates have fundamentally altered the landscape for Toronto condo buyers and sellers, with ripple effects likely to shape the market well into 2025.