Sorry, kids
On the final Friday of the summer the latest US inflation news is benign and Canada’s economy’s growing weedily. It’s all part of the destination we’ve been telling you about. A soft landing.
US interest rates will absolutely, without question and for-sure decline for the first time in years on September 18th. Two more after that, Mr. Market believes. So a healthy tumble by Christmas. Meanwhile our guys are expected to chop again on Wednesday, the third nip so far in 2024. And there could be two more here, as well..
Did you think back in February that Canadian rates could drop five (5) times this year? That employment levels would be acceptable? That the economy would continue to grow at a robust rate (the latest reports says 2.1%)?
Nah, of course not. We were too busy wailing about things. As usual around here.
But with each data point, that soft landing grows closer. Inflation in the 2% range. Lending rates rolled back. No recession. Anyone saying central banks blew this situation is unschooled. Inflation shot from 0% to 8% in Canada when Covid passed and a coiled spring of pent-up demand was released. Ten rate hikes brought it back down, but without gutting the GDP. Monetary policy doesn’t get much better than this.
And it wasn’t just Canada. The pandemic did the same everywhere – whacking the supply chain, creating chaos and shortages, fuelling high prices and creating a housing affordability crisis. The Fed, our bank, the ECB, the Bank of England – they all reacted the same way because that was the correct path. They tightened. Price growth retreated. Now they’re loosening.
But, as we all know, real estate – like the cost of bananas – has stayed high.
The question is whether a big and rapid rate decline will make homes more accessible and easier to finance. Or make things worse.
As this blog reported days ago, all of the major chartered banks in Canada have quietly crashed mortgage rates offered to buyers. Posted rates stay well above 5%. Actual rates are a full 1% below that – and going down. Yes, there is a mortgage war raging.
As mortgage broker and blogger Rob McLister wrote yesterday: “In an urgent bid to preserve market share amid elevated interest rates, high debt loads and feeble real estate activity, banks are pulling out all the stops. Seemingly, every mortgage broker I talk to recounts tales of customers being quoted astonishingly low rates by their bank.”
It’s true. Bargains are being cut everywhere. Mortgage lending has been so weak that loan officers – often graded on their volumes – are in a panic to shovel money out the door. As we reported here this week, new home construction sales have collapsed with inventory of fresh units plus MLS resales growing greater every day. A lot of buyers have decided (wrongly) that it makes sense to sit on the sidelines until rates have hit bottom, then to start shopping. That may well make the Spring of ’25 feel eerily like Rutting Season ’21.
Will sales jump once our CB has cut five times and mortgages have dipped into the 3% range?
Doubtlessly. Just as inflation ramped after Covid, because of pent-up demand, so it’s reasonable to expected buyers to come out of their cocoons.
Will valuations take off again?
Beats me. The wild card is how many listings have piled up by, say, March. It also depends on how many sellers throw in the towel, chop their price or accept below-ask offers. If the economy is growing, inflation has been wrestled down to 2%, wage gains are close to 3.5% and home loans have a three-handle, why would there not be upward pressure?
If your answer is: ‘because average families cannot afford to buy the average house’, you’re correct. But that does not mean residential real estate will fall in value. There are certainly enough non-average families willing to borrow freely and with move-up equity to cause a price adjustment.
“Many economists expect would-be buyers to jump into the housing market from the sidelines as rates fall,” says a US analysis of the global real estate problem. “That could collide with limited supply to push prices up. In Britain, for instance, a rate cut by the Bank of England this summer has already been met by an uptick in interest among would-be home buyers.”
“Experts also warn that long-running market trends — including high labor costs, more expensive materials and regulations that limit the pace and scope of building — will continue to hinder the supply of affordable homes. It has simply become more difficult to make affordable housing construction economically feasible. At the same time, demographic trends could continue to fuel housing demand in some markets. Add it up, and lower interest rates are unlikely to come anywhere close to fixing the affordability crisis in either purchased or rental housing.”
There was hope that ten interest rates hikes, a 1,900% increase in the Bank of Canada rate, 70-year amortizations, a renewal cliff in 2025, new laws and taxes aimed at flippers, speckers and foreigners and seven billion in federal spending would ameliorate the ‘housing crisis’ we hear about from the lips of every official.
Alas, it may not occur. Things are too good.
About the picture: “Another pictures of Tucker,” writes Bruce in Thunder Bay. “Thanks for all time and effort to your team. Your blog is a national treasure.”
To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.
Source: https://www.greaterfool.ca/2024/08/30/sorry-kids/
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