Low tide

A week ago there was one. Now, five.

All the major banks have dropped their 5-year fixed-rate come-to-Jesus mortgages below 5%. Halleluiah. It’s a massive plop from the 6.25% loans that froze the housing market more than a year ago. And, praise be, we ain’t finished yet. The next rate chop arrives a week from today.

So at RBC (which just reported fat profits) the 4.64% fiver currently edges out the others guys. Some mortgage brokers and dudes selling loans out of their hatchbacks are sub-4.5%, but the major lenders are clearly interested in ramping up the home loan business once again.

This comes as CBs everywhere are adopting looser monetary policy. Our bank has cut twice with three more to come in 2024. The Fed will go in September, and likely twice after that by Christmas. Rates in Europe and Britian will follow.

As a certain pathetic blog pointed out recently, before it was drowned in the tears of the victimized Mills, Za and cute little Alphas, this is a good thing. We are closer to a soft landing than many thought possible. Inflation can retreat to the 2% range, the economy can continue to grow, unemployment will not spike, interest rates can decline smartly and no recession occur.

It’s not what the burn-it-all-down, regime-change, Justin-screwed-us gang wants to hear. Ditto for the death-to-Boomers, GenScrewed crew who want house values to crash – whatever the consequences – as owners are tortured with high-cost renewals.

But there ya go. Happening. Deal with it.

However,  there are some really desperate things to discuss, which will make many of you doomers happy. The new-build industry is on its knees, particularly in the heart of the country’s biggest market. Developers, land-bankers, real estate marketers and gobs of people in the trades are idle, losing money or becoming insolvent.

Source: BILD

Today the latest stats were released. Ugly does not begin to describe it.

• The worst July ever for sales.
• Deals fell 48% year/year and are 70% below the 10-year average.
• In a market of six million people there were a mere 654 sales.
• Condo sales of 287 were 80% below the long-term average and almost 70% less than a year ago.
• Inventory is staggering. There are 17,445 unsold condos and 4,215 available houses. More than 20,000 homes have been sitting since the autumn of 2023.
• At the current pace it will take 15 months to sell this many. Another record.
• New condo prices are down 6%. SFHs are 5% less.
• As reported before, over 60 new developments containing thousands of new units have been cancelled.

What does this mean? Why are these units not being purchased? Why isn’t a plunge in the cost of money rekindling sales?

It’s complicated, but also simple. Builders don’t build unless there is demonstrable demand with new developments 70% sold before shovels bite dirt. This process – planning, approvals, marketing, precon sales, then construction and completion (depending on financing, trades and materials) – easily takes four or five years. So as the industry grinds down to nothing in 2024, it means a massive inventory shortage in the years ahead. “It’s building pent-up demand, because people will return to the market when interest rates go down,” says the builders’ group. “It will take longer for new construction to recover creating an unhealthy imbalance of supply and demand.”

Now look at price. The average new condo costs $1,020,079 in the GTA. Places with dirt attached average $1,585,881. To buy either you need hundreds of thousands for a downpayment and an income three times that of the average household. Even with five-year mortgages now in the 4% range, this makes buying a new unit an elitist event.

Will this landscape be altered as the Bank of Canada continues to hack away?

“Changes in interest rates will not solve what is an ongoing structural problem, particularly evident in the GTA,” argue the builders. “The cost to build, driven by excessive government fees and taxes, is simply too high. Without immediate action by government, new construction activity will continue to slow and the housing shortage will reach unprecedented levels over the next few years.”

That may be industry scaremongering. But it’s also economic reality. It costs what it costs to build housing – based on land, labour, materials and the infrastructure government has to provide. Nobody is going to throw up homes and market them below cost. Nor is Canada going to achieve even half of its stated goal of 4 million new builds in the next seven years. These are facts. Moan all you want. They will not change.

In what possible universe, then, do houses become affordable? Canadians are constantly wanting (and striking for) higher wages to offset inflation, yet adding to increased costs with every income gain. Now we’re ballooning tariffs on cheap cars by 100%. Meanwhile lower mortgage rates – dramatically lower in 2025 – will increase pressure on prices in the resale housing market.

In short, the Boomers did not cause this. The federal government didn’t. Nor immigrants. Our obsession with real estate, our unbridled appetite for personal debt, our house-favoured tax system and the cowboy recklessness of buyers during the pandemic have delivered us here.

Is there hope?

Perhaps a sliver. More on that tomorrow.

About the picture: “I’ve been reading your blog for 10 years, directed lots of people to it over the years, and have always appreciated your balanced, reasonable tone in a world of hyperbolically expressed views,” writes Allen, from North Van. “Despite all your freely given counsel, our family decided to purchase a place this winter. Even so, you were there on our shoulders as we budgeted to decide what we could afford, how to structure the debt, etc.  We knew the downsides going in, so we didn’t overextend ourselves and looked to maximize the “intangibles” that buying offered.  Here in North Vancouver, we had been subject to a series of tenancies ended by owner-occupiers, so our newfound stability is much appreciated. We left plenty of room in the family budget to continue investing in our portfolio, which will eventually provide income to match my DB pension. The place we bought is two blocks from work and school, so the car now sits parked. We are very, very fortunate and grateful people. The best intangible of all, though, is that we were finally able to get a dog after years of living under leases that didn’t allow them. We got Magnus the Havapoo at the beginning of August, and all three of us are madly in love with him. I’ve attached a photo for your appreciation. Thanks again for your years of public service, both in office and on the internet. You’ve helped a lot of people keep their heads on straight.”

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

Source: https://www.greaterfool.ca/2024/08/28/low-tide/