The prelude

They’re getting ready.

A majority of economists think Tiff will drop the CB rate again two weeks from tomorrow. That will plop the Bank of Canada rate to just 3% and drive down variable mortgage costs.

Why? Didn’t we just get a gangbusters jobs report suggesting economic strength, rising incomes and probably more inflation?

Yup. Did. But everything changes come Monday, when Tariff Man may be signing 100 executive orders, including one to whack Canada. Our guys are preparing for anything, as the betting grows the American president will impose that 25% indignity.

There’s more. The central bank also announced it’s getting ready to slide back onto pandemic-era footing, if required. That’s when it spent billions to buy up bonds, forcing market interest rates down in order to throw around more stimulus than Beyonce on a horse. In chaps.

If tariffs come and Ottawa does not immediately retaliate, we have a recession brewing. Inflation will slide lower than the current 1.9% and 2025 will bring more rate cuts. Maybe another full 1% worth. If the feds fight Trump, however, rates will be paused. Inflation could bubble higher faster (because of costly US imports and a sick loonie), and rates could be higher by Christmas. We just don’t know. The president is crazy-unpredictable.

“Tariffs are a clear, unambiguous negative for the Canadian economy and the Bank of Canada would likely be forced to react with lower rates if we do get tariffs,” says BMO’s economist. But if we impose our own tariffs, says Scotia’s Derek Holt, the cost of money could catapult by up by 3%.

Now, what does this mean on the street?

Despite the happy jobs stats and diving CPI, things are weaker than they appear. The number of folks living paycheque-to-paycheque is growing, says a new survey. “Most Canadians are now feeling more negatively about their personal finances heading into the new year,” says MNP Canada.

“After significant declines in insolvency anxiety, half of Canadians (50%, +8) are now $200 or less away each month from not being able to pay their bills and debt payments. This is a result of significantly more Canadians saying they are already insolvent (35%, +9) compared to last quarter. Canadians who disproportionately report being $200 or less away from insolvency continue to be women (55%, +4) but the proportion of men at risk has increased to 44%, up 13 points from last quarter.”

Hmm. Not good, if accurate. And what do the latest condo and new-house sale numbers tell us? That market seems to e in freefall, according to the BILD guys. We’re now at the lowest level since 1996 for transactions. Sales in Toronto, for example, fell 64% in 2024 from year-before levels. “The new condo market just experienced its toughest year in three decades,” says Urbanation. Not only are newbie buyers scarce, but investors have vanished. High rates, more taxes and falling rents make being an amateur landlord a losing gig.

How serious is this?

Bordering on historic, it seems. In a normal year 52% of new condo units hitting the presale market would be sapped up. Last year that plunged to just 10% – which means 90% went unsold. In fact at the moment, in this one urban area, 24,277 new housing units are languishing unsold or vacant.

This is despite (a) mortgage rates being a full 2% lower than two years ago, (b) 30-year mortgages now being available to all first-time buyers, (c) the bloated new withdrawal limits from RRSPs for downpayments, (d) the insanely generous tax breaks offered by the FHSA for fresh buyers and (e) CMHC changes allowing insurance on expensive homes and downpayments of up to 60% less.

Conclusion: the ice is thin. The cracks are serious. But surely the government will save us.

Oh, wait…

About the picture: “This is Frankie,” writes Allison. “He’s a 70 lb extravert mutt and the only thing he cares about is where and when he will find his next friend.  Also a blog question: wonder if you could post about what might happen if the principle residence exemption were ever rolled back. Should it be replaced with something else that would encourage more productive investment and what would that look like? (eg way more RRSP/TFSA room or a lifetime capital gains exemption max amount for every canadian). “

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

Source: https://www.greaterfool.ca/2025/01/17/the-prelude-4/