Five – then what?

An urban lawyer claims a 50% increase in the number of real estate closings that, well, don’t close. Usually it’s because of bank appraisals that come in light. The buyers are tapped out. They were foolish to make an offer. Even more foolish to walk. The consequences amount to far more than a lost deposit.

So it’s a weird market. Listings have shot up. So have DOM (days on market). The SNLR is a mess (sales-to-new-listings ratio). MOI is going nuts (months of inventory). There are more condos on the GTA resale market now… than ever. As we told you recently, you can also add in 21,000 available but unsold new units. That’s a 14-month supply. Unprecedented.

That pile of unsold homes is growing larger & larger

Source: Scott Ingram

Local boards will be reporting stats this week. Likely sales will be anemic. Inventory up year/year. Prices down mildly, but sticky. It’s a standoff now between sellers who don’t want to discount deeply and buyers waiting for interest rates (and prices) to fall further. Meanwhile the affordability needle has barely budged. A house is no longer an entitlement, as a whole generation is learning.

But wait. Will Tiff change all this?

Wednesday morning we get the third interest chop in a row. The Bank of Canada was the first major western CB to drop its inflation-fighting policy rate, and will be the premier one to do it thrice.

More to come, too. Mr. Market is pricing in an additional quarter-point drop in October and another pre-Christmas. By then the rate will have travelled from 5% (a 23-year high) to 3.75%. That will amount to five decreases in seven months, and a shaving of 1.25% by the CB. A very big deal.

As you may know, the US Fed has yet to cut once. That’s expected to change this month, as well, with two more reductions anticipated by the end of the year. Cuts are also on board from the European Central Bank and the Bank of England.

Mortgage rates in Canada (five-year fixed) have dropped into the 4% range. It’s widely expected some home loan prices will start with a ‘3’ by the time the Spring market arrives in March. Through the course of 2026 economists expect to see another 1.25% carved off the central bank rate, taking it to 2.5% – or half what it was just months ago.

So here’s the questions: is this rash, too quick and cowboyish? Is it really time to abandon the fight against inflation and worry about jobs and the economy instead? And will five interest rate reductions be the match that lights housing’s fire once again six months hence?

Yes, some think Tiff is riding bareback.

Read this withering assessment by Derek Holt. As chief economist at one of the Big Five, he’s not to be ignored.

In my opinion, the BoC is not out of the woods when it comes to inflation risk and should proceed very carefully without overreacting to a handful of months of data. Immigration remains wildly excessive. Housing shortfalls that existed before the pandemic have grown more acute and are likely to remain that way throughout the decade and possibly beyond. Real wage growth is accelerating while productivity continues to tank. Fiscal policy is still adding to GDP growth and it’s reasonable to think there will be more stimulus applied into an election year given the Federal government’s poor polling. The potential combination of monetary and fiscal easing feeding off one another may well reignite inflation risk. It’s also very premature to conclude that serial supply chain shocks are over in light of geopolitical tensions, soaring shipping costs due to Red Sea tensions, and labour strife in Canada and the US.

Seriously valid points. Unions are striking for more money (inflation). The feds can’t stop promising/spending (inflation). Real estate prices are insane (inflation). Trump could win (inflation). The threats and risks are tangible. Balanced against that is the desire by TPTB to keep employment robust, the GDP expanding and the nasty recession wolf away from the door.

So, Holt or no Holt, the market odds right now dictate five rates cuts in 2024.

Will that be enough to jolt housing back to life, breaking that impasse between vendors and purchasers?

History suggests so. A drop in mortgage rates from 6%+ (late 2022) to 3%+ (early 2024) is immensely meaningful. For example, a mortgage of $500,000 (modest these days) would see payments plunge from $3,350 to $2,496 – a 25% reduction. And since all buyers care about now is the carrying cost, not the purchase price, the incentive to make an offer is real.

Logic dictates – if the CB carries through as expected – that sales will increase and inventory be reduced. Whether prices rise or not depends on consumer confidence, how desperate lenders become (they’re starving at the moment) and stuff we don’t know (the US election, Ukraine, Netanyahu, Chrystia). As we’ve stated, average people and newbie purchasers do not need to be engaged to see real estate values rise. Move-up, ‘equity’ buyers can do that all on their own. And after a dismal twelve months there’s plenty of pent-up demand.

Could Tiff err? Of course. Wouldn’t be the first time. But falling rates are a global reality. Moreover, Canadians are financially stressed and looking for relief.

So, throw them cheaper loans and encourage more borrowing. What could possibly go wrong?

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Source: https://www.greaterfool.ca/2024/09/03/five-then-what/