The cooling

Some thought any chop by the Bank of Canada would send hormones wild. So far, ain’t happening. But change is in the air.

First, the street news. Condo listings have exploded. Sales are comatose. Precon buyers who face closing years after their first offer are having a cow. Many can’t qualify for financing. Lots know at these mortgage rates they’ll be in deep negative cash flow as landlords. Most understand they can’t sell fast or for as much now that the market’s a mess. Builders have stopped building. Inventory is bloating. Analysts are forecasting a big problem in three years when supply dries up. And so – unless we get meaningful rate cuts quick – the ‘housing crisis’ may be in its infancy.

But wait. What just happened?

And how do we explain this?

A bombshell earlier today – with the potential to change a lot – was a report showing US inflation just cooled faster than Hunter Biden’s career. Instead of shooting north of 3.5%, as widely expected, the CPI came in at 3.4%. Seriously, that’s a big deal. It ignited stock markets, send bond prices skidding higher and reignited hopes the Fed will chop its rate in September and again two days after the crazy American election.

Mr. Market is now pricing in two reductions in 2024, just a week after thinking there may be zero. That was enough to send the S&P into new record territory (again) and came just hours before the latest central bank decision to keep rates on hold for now (the seventh time).

This was the best inflation performance in the States in two years. Energy and gas prices fell. Cars and clothes got a little cheaper. Food was flat. Shelter costs stayed high. Core inflation (x-food & energy) was half the anticipated amount and the best since 2021.

Said the economists at BMO: “If sustained, it will keep Fed rate-cut expectations that we have penciled in for September and December alive and well. Restrictive monetary policy has more work to do, and the Fed will remain patient and watchful. However, today’s far softer CPI report will go a long way in making the case that it can soon safely ease off the monetary brake pedal without risking another inflation episode.”

Now, all this had our head CBer, Tiff Macklem, dancing in his heart-festooned shorts in the bank’s Wellington Street bunker. He was the first guy in the G7 to go from tightening to stimulus (every man’s fantasy), which was clearly a gamble. Then the Europeans followed suit, as the ECB nipped off a quarter point. Now a Fed reduction is back on the table, reducing risk that Canada could be an outlier and putting our current less at risk.

The Fed says, naturally, this is but one report. Lots more data to come over the summer. Meanwhile the world is an unsettled, pissy place with two hot and tragic wars, populists ascending, China in trouble, Drake about to announce a tour and Trump filling stadia as election day inches closer. Consumer sentiment remains negative and unemployment rates in Canada and the States have been creeping higher. Given the overhang of debt, a huge wave of mortgage renewals coming in this country and a worrisome savings rate, policymakers are concerned that if rates don’t plop, the economy may.

So the betting remains Canada will end up with three rate drops in 2024 and (likely) three more in 2025. The policy rate will then have travelled from 5% to 3.5%. Chartered bank primes will be sub-six and mortgage rates will start with a ‘4’.

Naturally this will make financing cheaper. But will that, in turn, make house prices rise?

As stated, no evidence so far. In fact, the market is not doing too well at the moment (expect in Calgary – make sure you bring bottled water) and prices are under pressure – especially those condos. We’re heading into the summer doldrums, when activity usually slows and competition thins. Given the condo crunch and the renewal cliff, odds are this season might be worse than normal.

The autumn, however, could see a reversal especially if we have twin US and maple rate cuts in September. And there’s a hefty chance that will happen.

Then all hell breaks lose in November.

About the picture: “I wanted to reach out and thank you for your blog, the advice offered within is life changing,” writes Damian, “even to those who don’t live in Canada! Here in Australia I think we are even more house crazy than Canucks, but your daily medicine helps keep ETFs topped up and the FOMO at bay! To help resist the ongoing deluge of dog pics, here is a picture of our two terrible rescue Siamese living their best life in Hobart, Tasmania. More like loyal dogs than your typical feline, they loved nothing more then “helping” us all around the house and yard. Treats not required, but appreciated! The larger cat, Max, had a slightly vampire like overbite, but definitely had no trouble eating!”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.