Not there yet

The CB’s decision today was as expected. A half point. It’s the biggest rate cute so far. It’s good, appropriate and people should be happy about it.

But, alas, not enough.

The Bank of Canada says its neutral rate is about 2.75%. That’s the level of interest at which the economy is neither hurt (constrained) or stimulated. After today’s chop, we’re at 3.75%. So there is a full percentage point yet to lop off.

Said Tiff this morning:

With inflation now back around the 2% target, Governing Council decided to reduce the policy rate by 50 basis points to support economic growth and keep inflation close to the middle of the 1% to 3% range. If the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further.

Why is it important to get there pronto?

Inflation is crushed. Last month it was 1.6%. If rent and mortgage interest were stripped out, it would tank below 1%. Ironically, a higher BoC rate means more mortgage interest which breeds more inflation. So rate cuts will themselves bring a lower CPI – and more rate reductions.

Second, inflation expectations. Read the sad comments posted here yesterday. You’d think this blog was created for Gazans or Haitians after wading through the moaning, whining, foaming and wailing they contain. Legions of people think inflation is crushing them, that life is an open sewer and big-mama government should rush in to provide affordable housing, eliminate free health care waiting times and reduce the tax burden (when 40% of us pay no net tax). The entitlement is palpable. No set if politicians will ever satisfy the masses now. As stated, this has brought us to a season of change-for-change-sake.

Unable to deal with an historically modest rate of inflation (4% annually over the last four years) people now demand big wage gains and public subsidies. No wonder union bosses have seized on this of late to mobilize their members, demand fat increases and consolidated their power. Smart.

Third, Trump. We’ve boon over this ground already, but if the guy wins, Canada loses. If Trump implements global tariffs, we get whacked. The CB’s projection of growth of 2.1% next years and 2.3% in 2026 gets knocked into a cocked hat. We can’t go into that storm with a weakening GDP.

Fourth, current rates are festering a housing market wound. And, like it or not, real estate forms a big chunk of this nation’s economy. Investors bailing out of condos with negative cash flow. Builders are failing. Over 60 big projects in the GTA alone have failed or been cancelled. Construction financing is a problem – scarce and expensive. Only a small fraction of the new homes that governments promised would be built have been started.

Thousands of investors who bought rental real estate are losing money, hand-over-fist. Costs have surged. Mortgage financing charges have ballooned. Rents have been static or started to fall. Anti-landlord legislation has tipped the balance of power. Listings have swollen, sales are limping and prices of rental condos are dropping. Meanwhile tens of thousands of units sold pre-con are coming onto the market and into the hands of buyers who can no longer finance them with rents. It’s a mess – threatening the viability of the new construction politicians promised.

So, rates must fall.

If they do, the Bank of Canada paints this rosier view of the next two years:

GDP growth is forecast to strengthen gradually over the projection horizon, supported by lower interest rates. This forecast largely reflects the net effect of a gradual pick up in consumer spending per person and slower population growth. Residential investment growth is also projected to rise as strong demand for housing lifts sales and spending on renovations. Business investment is expected to strengthen as demand picks up, and exports should remain strong, supported by robust demand from the United States.

Of course, it’s all subject to change. FOMO could erupt and change the chemistry of the real estate market. Trump might be blown out of the water in next month’s vote. You never know what’s around the corner.

But this much seems clear: there are more rate cuts to come. Your GICs will wilt along with high-interest savings accounts. A big-city condo meltdown is more likely. The inflation rate will sink dangerously, but prices won’t move much. The moaning will continue, unabated – here in the First World.

About the picture: “Elder millennial here (cringe),” writes Lauren. “Love reading your blog over my lunch break. Appreciate your insights & daily commitment to sharing your words of wisdom. You & Dave Ramsey help keep me sane when all my peers are going crazy for real estate, cars, and fancy trips. You asked for dog owners to step up & send in pics. Here’s Henry, our rescue chihuahua enjoying his best life. Prefers maximum pillows when sitting on laps or the couch. Fur baby to me, absolute gremlin to my husband.”

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

Source: https://www.greaterfool.ca/2024/10/23/not-there-yet-4/