Well, that does it

The loonie slipped again Tuesday. No wonder. The Bank of Canada is about to lay a big October egg next Wednesday morning.

That’s when interest rates will sink a half-point lower, giving the CB rate a 3-handle for the first time in a couple of years. The chartered bank prime will be 5.95%. The Canada 5 bond has already dipped below 3%, which last happened in April. As a result expect fixed-rate mortgages to slide along with the variable ones.

And, yes, the dollar has lost two full Yankee pennies in value since August – not because of politics or policies, but because Canadian rates are leading the world down. The fourth central bank cut is soon to arrive, and with it Tiff has a new worry.

The big news this morning was an inflation rate (annualized) last month of just 1.6%. That was down smartly from two per cent the month before, and is a crushing collapse from the 8.1% we hit post-pandemic. Whether you like it or not, this is a major win for the Bank of Canada. So far they have pulled it off – a soft landing, a meaningful decline in the cost of living engineered by high rates and without a jobless spike or recession. The Holy Grail.

Why did the CPI crumble?

Gas is cheaper. Mortgage interest is plunging. Even rents are wilting a little. In the past 43 months, since inflation became a thing, prices for everything increased 16%, or an average of just over 4% annually. In the sweep of history, hardly worth mentioning, But it caused an entitled, coddled, comfortable population to have a cow.

Now we’re under 2%, and a new risk has emerged. Disinflation (what we currently experience) could become deflation. That is the economic condition central bankers, plus everyone with a memory or a financial education, fears most.

Prices don’t fall on their own. They take revenues, taxes, profits, jobs and the economy along for the ride. In a deflationary environment people wait to buy stuff, knowing it will get cheaper. So business earnings collapse, workers get laid off, wages ad prices decline further, taxes on incomes and profits take a dive, government expenses grow along with unemployment and we have a giant, sticky mess on our collective hands.

Real estate is a biggie. In a deflationary environment, prices tumble but debt does not. In a nation where citizens have raked up $2.2 trillion in home loans, hundreds of thousands – perhaps millions – could find themselves with zero equity, making payments on loans worth more than their homes. And when job loss is endemic, that stress and anxiety is layered on top.

Trust me. You do not want deflation. Nor does Tiff. So he’s gonna fight it.

Just as the Bank of Canada tackled post-Covid inflation with ten rate increases, so it shall battle potential deflation with a string of rate cuts. Come Wednesday, there will be four. By Christmas, five. By the middle of April – six months hence – we could see eight reductions.

Incredibly, this could bring back 2% mortgages, depending on the data over the winter months. Of course, the US election result will factor into this, as will the American Fed’s action on rates south of the border. But cheap home loans by the Spring rutting season are more a possibility now than could have been imagined earlier in 2024.

Meanwhile, come mid-December, all first-time buyers will be able to score a 30-year mortgage amortization. That lets people reduce monthly payments or, more likely, borrow more. The CMHC price cap is also being jacked to $1.5 million. Big move. No longer will buyers of any house worth more than $1 million have to cough up a 20% downpayment. The funds required to buy collapse by almost 60%.

Finally, as you know, the number of listings has bloated like a pig-eating snake. Add it all up – tons of inventory and motivated sellers, desperate lenders, lower downpayments, longer loans, cheapo mortgages – and all the elements are in place for a real estate revival.

If you were waiting lower prices, well, don’t. Now they scare us.

About the picture: “Your daily blog has been a staple for years,” writes Elizabeth. “It’s great to have a Canadian point of view. And all ad-free! Amazing! Here’s Wayne enjoying a Smoke free summer in the Okanagan. Gorgeous views of Mabel Lake.”

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Source: https://www.greaterfool.ca/2024/10/15/well-that-does-it/