The standoff

When the housing stats are released tomorrow, the standoff will be clearer.

Sales suck. Listings up. Prices sticky. Inventory growing. Buyers waiting for prices to crash or mortgage rates to tumble. Sellers are convinced a year of pent-up demand and multiple interest rate drops will ignite FOMO. So why should they sell cheap? Besides in this market if you find a buyer, where will you move? How can you accept a low-ball offer? Everything costs too much.

This is how markets freeze. And here we are. Frozen in September.

The result is a kind of price paralysis. Lately we’ve seen precious little movement in the major markets, given the fact one of the most aggressive rate-hiking events in history just played out. It’s made people doubt that age-old adage of an inverse relationship between the cost of money and the cost of a house. This time one shot skywards and the other stayed stuck in the dirt.

So is it different this time?

Unlikely. It never is. But the story is not finished yet.

Check out this little chart from an outfit in Australia. It compared living costs in 28 countries – the burden on family cash flow to afford a piece of real estate – and we’re No. One!

Source: Compare the Market

Against this backdrop of unyielding sellers, born-again realtors and aggressive lenders the only glimmer of hope buyers have now – especially the newbies – is the falling cost of financing. As you likely know, the Bank of Canada did what we all anticipated this morning and dropped its policy rate another quarter point.

Three in a row. Now we sit at 4.25%. Two more to go in 2024. Mortgages close to 4.5% will be on sale at 3.99% or so later in the year or certainly by the Spring. It’s a far cry from the 6.25% that was prevalent way back in 2023. As referenced here yesterday, economists see a further 1.25% being shaved off the CB rate during 2025, taking it down to just half of the inflation-fighting peak of five.

So will buyers hold off for six to twelve more months until home loans have (maybe) a 2-handle? And if we do get mortgage rates back near that level, will prices just swell to negate any advantage? In others words, will buyers be paying a far lower rate on way more debt?

Here’s how the ever-articulate and always-crusty mortgage broker/blogger Ron Butler reacted to Tiff’s morning cut: “Many of those people [potential buyers] will discover rates are lower but house prices are still batshit crazy in Ontario & BC. These people will do the math of down payment & monthly payments & decide buying a home is still damn near impossible. I have done the math & it’s pretty damn ugly.”

How about investors? As mentioned, there are 17,000 shiny new condos available in the GTA alone. When rates were lower investors gobbled them up for rental units. Will three rate drops now rekindle interest?

“For real estate investors buying rental properties the math doesn’t work at all,” says Burtler, “and won’t work even at a 3.75% mortgage rate in the GTA & GVA. Turns out you needed 2.49% mortgage rates OR LESS to float a barely break-even rental in those regions. Investment RE is over for now.”

By the way, the Bank of Canada has signalled there are more reductions to come. This is no longer conjecture. It’s gonna happen.

And here’s one reason why. ‘High’ rates in place for the last two years sent tremors through the banking system, after lenders showered cheapo mortgage debt on a FOMO-addled populace. All of the Bay Street titans have put aside billions to cover potential bad loans, reducing profits and stock values. Over 75% of all residential mortgages come up for renewal in 2025 and 2026, so a serious rate drop by the Bank of Canada will make that survivable.

Source: WOWA.ca

In short, young people who feel that there is a status quo cabal in place are right. There is. Nobody seriously wants cheaper houses. Not lenders. Not the realtors, brokers or boards. Not the central bank. Not existing homeowners. Not Bay Street. Not the investors and landlords. Not the government. And not the government-in-waiting.

And now, with rates falling, the economy chugging and a soft landing approaching, there will be no burn-it-all-down recession to bring property owners to their knees.

The deep state, kids. Seriously.

About the picture: “Hi Garth, Snow in August in the mountains of Vancouver Island’s Strathcona Park,” writes Jeremy in BC. “Louie likes to eat the snow!”

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

Source: https://www.greaterfool.ca/2024/09/04/the-standoff-3/