And down we go

The Bank of Canada chopped a quarter point today. Again. The chartered banks are following suit. VRMs, lines of credit and some related loans are also getting cheaper. Five-year home loans aren’t budging yet. Usurious reverse mortgage rates stay that way. And nobody was surprised when the CB pulled the trigger.

The big question is, why?

Is inflation really dying? Or is the economy in trouble? If the former, then as money gets cheaper you might want to start shopping for a house. If the latter, piling into a whack of new debt would be a bad move.

Why does Tiff think this was a great idea?

First, the economy is not rolling over, but he admits it‘s tepid. “Household spending, including both consumer purchases and housing, has been weak,” the bank says. “There are signs of slack in the labour market. The unemployment rate has risen to 6.4%, with employment continuing to grow more slowly than the labour force and job seekers taking longer to find work.”

Second, inflation is coming down – back to 2.7% here – and moderating in the US, Europe and China.

Third, real estate costs need to decline (yeah, he’s actually saying that). “Shelter price inflation remains high, driven by rent and mortgage interest costs, and is still the biggest contributor to total inflation.” In other words, so long as mortgages stay north of 5%, the CPI will be fueled by high debt-service costs. Until the cost of financing a home drops, inflation will stay stuck. So it must happen.

And, finally, the guys in charge are forecasting two things: a modest rebound in economic growth next year and into 2026 (as they reduce rates further), and a real estate revival. “Residential investment is expected to grow robustly,” the bank said in its official statement. In fact, that is a goal.

What are we to make of this?

The initial reaction among some of those most affected by the rate gyrations was churlish. “This cut was totally priced in by the Bond Market & 100 out of 100 Economists,” said contrarian mortgage broker Ron Butler. “The reason is simple: The Canadian economy is in a downward spiral which will kill inflation. The US Fed cuts will give Bank of Canada Governor Macklem all the cover he needs to get to 4% this year with the Canadian dollar collapsing. What happens in 2025: more rate cuts. By the summer or fall we will have a 2.75% or 3.00% Bank of Canada rate… Likely it will take 2 years of lower rates to stabilize the Economy. Canada has one of the top 3 highest consumer debt loads on Planet Earth. May not end well.”

As reported yesterday, Scotia’s Derek Holt thinks Tiff Macklem is blowing it. He continued on that rant this morning even as the CB head was wielding the axe, as most economists had predicted. “The community of economists – especially ones with undiversified clientele exclusively serving real estate audiences – failed to do their jobs over the past two months of inflation reports while pumping a confirmation bias. Most of the street’s economists slept walk through the last two inflation reports.”

Holt says inflation demons still lurk throughout the economy and the dudes in Ottawa may regret having been in such a hurry – to save the housing market where inventory is piling up, sales suck and prices have barely budged.

Meanwhile he’s right about how most Bay Streeters think. Lower rates, sunshine and ponies all around.

“The door is still open for additional cuts, and September is very much on the table if the next core CPI print behaves,” says BMO’s chief economist Doug Porter. “The tone of today’s many remarks almost seems to suggest that the Bank now needs to be convinced NOT to keep trimming rates. We continue to look for two more rate cuts before the end of 2024, taking the overnight rate down to 4%.”

So, imagine it’s December. The Fed has cut rates twice. Our guys have chopped four times. The American election is over. President Harris pledges the status quo – no craziness in the Oval Office. The S&P has just finished a boffo year of gains. Adele has retired. The Gaza war’s over. Putin is Trumpless. And the Canadian real estate market is gearing up for a Spring ’25 rutting season with rates back at 2022 levels.

What? You expected something else?

About the picture: “In response to your urgent call for dog pics.. here is Molly,” writes Satu, “our American  cocker spaniel enjoying a nap while keeping cool.  Molly was featured in your blog several years ago.  She is now 13 years old, hard of hearing but otherwise a happy pooch. Time with her is precious.”

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