Reality Bites

“For years this blog was saying that the RE is overpriced and that it will screw up people’s finances and the prices should come down to make it more affordable,” wrote a poster yesterday.

“Here we are: highest rates in 20 years, RE still unaffordable, and you’re telling “it will most probably continue to get more expensive because high rates did almost nothing (maybe brought the prices to the 2021 levels). So you understand now why the long-time readers are a bit pissed seeing this, right?”

My response was, ‘Shall I lie?’

Unlike most of the swamp we call social media, this blog doesn’t have an agenda. Well, not entirely true. Dogs over cats. Civility over slogans. And crapping on people just because of they’re old, realtors, elected or newcomers is weak and wrong. And don’t ever bring up Adele or Drake.

Regarding houses, yes, they are ridiculously priced. That’s resulted from dumb tax laws (res real estate is the only asset class yielding untaxed gains), pandemic monetary policy, a cultural obsession with property, widespread financial illiteracy (starts with the teachers) and politicians unable to deal with real estate. Lately governments at all levels have become ownership advocates – witness the FHSA or $8 billion in federal spending, for example.

In the 16 pathetic years of this blog’s existence it’s become clear the incentive politicians once had (last seen in 2017) to slap prices down is now gone. No federal party is campaigning for lower property values. None. In fact the guys in charge have made it clear an equity dump would hurt too many families and retirees. So, for example, PR capital gains will remain free of tax, forever baking in historic price gains and passing that burden on to new buyers.

Given the above, the only reasonable hope was that a surge in mortgage rates would drive market prices down. In the past, it’s always worked. That inverse relationship between house values and interest rates was a rock of economic theory. But when the Bank of Canada raised its market from one quarter of one per cent all the way to 5%, crickets. Prices have barely moved.

Why?

Government. And the banks.

A slurry of new taxes increased the cost of real estate. The population grew rapidly once Covid left town. Sellers bought into the story that rate hikes would be temporary. Supply-chain issues from the pandemic combined with big wage gains and material price hikes to shoot building costs higher. The banks (5 of the big 6) had variable mortgages with fixed payments so owners weren’t forced into distress. The federal government codified long amortizations. Billions in public money coursed into goosing the housing market. Then the central bank indicated rates had peaked. Now they’re dropping. So the mortgage renewal cliff has turned into a minor speed bump.

As a consequence, the cost of a house is basically unchanged – even as this tightening cycle ends. Surveys tell us affordability has never been worse. The first-time buyer has pretty much become extinct. New housing starts were up a little last month but have cratered over the past year. Nobody in public life has come up with a credible plan to stop Canadians from wanting to buy real estate and swallowing massive debt to do so. Now the realtors tell us to prepare for a new boom.

“With another rate cut announced on July 24, we’ve now seen two rate cuts in a row, and the expected pace of future policy easing has steepened considerably, with markets now anticipating rate cuts at every remaining Bank of Canada decision this year,” says CREA’s senior economist Shaun Cathcart. “Combine that with a record amount of demand waiting in the wings, and the forecast for a rekindling of Canadian housing activity going into 2025 has just gone from a layup to a slam dunk.”

Slam dunk. Now consider the economic context.

There’s no recession. Employment levels have been steady and positive. Wages gains all year have exceeded inflation, which is back in the 2% range. Stock markets are roaring. Corporate profits have increased by double-digits in a year. The Trump threat to Canada is being blunted (economists say his trade policies would raise rates here by almost 2%). And now the Bank of Canada – and the Fed – have started loosening policy. Canadian rates will be a full 2% lower in a little more than a year, markets figure. The US will cut three times by Christmas. The first major bank just re-introduced a fixed mortgage with a 4-handle. Next year they will be in the 3% range. Or a bit lower.

All of this suggests the hated realtors are right. Cheaper money + two years of depressed demand + a soft economic landing = FOMO.

Like I said, this blog could lie to you. But it won’t.

Repeatedly we’ve shown you housing can be a financial sinkhole, why renting can beat owning, how to build wealth with success outside real estate and the unjustifiable cost and burden that a property represents. If you can’t get over it, at least man up to the consequences.

About the picture: “Hi Garth, on our walk today had to share,” writes Michael in Victoria. “Education is very important. Than you for your year of wisdom!”

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

Source: https://www.greaterfool.ca/2024/08/16/reality-bites-4/