Whither confidence?

Here’s a shocker.

In one bustling region of the GTA, 60% of all the listed houses with an accepted offer are SOP. That means ‘sale of property’ – so the offers are conditional upon the buyer being able to flog his/her own house. If they can’t, the deal is dead. The deposit is returned. No sale.

In that situation the vendor takes all the risk. The property is tied up as far as the market is concerned. Showings trickle away. Potential buyers drift to other properties. And the seller waits, impotently, to see if her buyer can find a buyer.

This, in other words, is a desperation offer. A last resort. It’s an offer you’d accept when the well of serious buyers has gone dry.

So, when six in 10 current deals are SOP – with inventory levels leaping higher and prices stuck on hold – we know how messed up the current housing market is.

Will things change this week?

Maybe. On Wednesday the most important central bank on the planet takes a pivotal action. The Fed will lower its policy rate for the first time since 2020 – when the pandemic rolled in and policymakers freaked out. The cut will be modest – 25 bps – but will likely be followed by two more this year, in October and December.

Our guys have already dropped thrice, as you know. In fact, the bank of Canada was the first major CB in the world to start the easing process. As we’ve detailed here, all major bank economists now expect two more in Ottawa by the end of the year. One of them, maybe both, will be half-pointers, says CIBC. By the end of 2025 we will have a bank rate that’s travelled form 5% all the way back to the 2% range.

Already mortgages (fivers) have dropped from more than 6% to just over 4%. Monthly carrying charges have eroded smartly. Lenders are aggressively trying to build their loan portfolios. Credit is plentiful. And yet real estate sales are languishing, listings are piling up like driftwood and six in ten recent ‘sales’ are not sales at all. Just fishing.

Why?

Everybody knows rates are dropping. They understand it’s not over. And they’re waiting for 2% loans to come back. Astonishingly, they will. Next year.

Affordability is terrible. The cost of properties has not dropped meaningfully, and a large swath of buyers has been removed from the game. Many of them, permanently. Sales volumes will increase as mortgages continue to cheapen, but the rush and gush of the past (2021, 2017) is over. Maybe forever.

Politicians – Trudeau, Fraser, Freeland, Poilievre and the premiers – have lied to people sufficiently to remove demand from the market. Everyone’s being told a torrent of new builds is coming – four million units nationally – and that will solve the housing crisis. But they’re not coming, nor would prices ameliorate if they did.

There is economic uncertainty in the air, much of it based on misinformation and memes. Social media is rife with warnings of recession, calamity, job destruction and collapse. People want to be victims. They gain context by thinking they live in the worst of times, which makes struggle and failure more acceptable. So while financing gets cheaper, real estate choices more plentiful, inflation subsides and financial markets are buoyant, folks wallow in self-doubt. Too bad, given what the next few years will deliver.

By the way, the S&P swelled by 4% last week. The TSX on Bay Street sits at a record high. It’s gained over 12% this year. Rate-sensitive assets have been romping as rates crumble. Utilities and REITs are up 20% over the past year, and 15% since mid-summer. Bond prices have been crushing it as yields fall. B&D portfolios have delivered three times the return of a GIC. Inflation is low and stable. The economy is solid. Interest rates will be falling consistently for the next year.

If you’re depressed, you are not paying attention. Or made bad choices. These may be the good old days.

About the picture: “You have featured Tilly before,” writes Harb, “as she has been growing. Just over a year old now, she is training us. Here she is waiting patiently for me to lay down with her at the top of the stairs while she settles down with a chew toy. I have to go up with when she gives me the look, if I delay she will back. Thanks for the blog, really appreciated.”

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Source: https://www.greaterfool.ca/2024/09/15/whither-confidence/