The 2-handle

To buy a house costing $2 million takes courage. And cash. Lots of it, including a 20% downpayment and a fat income. After putting $400,000 down and paying $73,000 in land transfer tax (in Toronto), the monthly mortgage nut is $10,300 (at 5.6%, five-year, 25-am). Plus property tax, insurance, utilities and upkeep. After shelling out $440,000 in interest over sixty months, you’d still owe $1.5 million.

By the way, this would require earnings of around $400,000 to qualify for financing. The average household income in T.O. is currently $110,000. Over 90% of people don’t make the cut.

So, how is this even possible? RBC already told us properties costing just over half this amount are severely unaffordable. The worst ever. Even when mortgages were 15% or more.

But wait. Look at what the house-humping Zoocasa site is claiming. The average house (not necessarily a nice one), it finds, will be at or above the $2 million mark by 2034. Ten years. So if you start today, kids, you only need to save $40,000 a year (and get a job as a bank CFO) to join in.

As rates fall, the Z people correctly point out, real estate rises in cost. “In the case that rates do begin declining this year, we can anticipate a corresponding price increase in the market overall, meaning we can reach this multimillion-dollar average home value even faster.”

Now, for the record, the sale price of a detached in 416 has touched $2 million briefly during a post-Covid Spring market. But it’s now retreated to the $1.7 million range. Of course, in many hoods $2 million continues to be merely the entry point. Rosedale is close to $4 million on average. Even the cheek-by-jowl mini McMansions of Leaside are routinely north of $2.5 million. The local real estate board stats show forty per cent of the entire city is in the two-mill zone. So, can prices actually migrate north everywhere?

Depends. If the economy stays positive and unemployment doesn’t spike (no recession) any interest rate declines will likely bring out more buyers willing to take the plunge. Meanwhile governments have been priming the pump. The latest dumb moves came from the feds, who have greenlit 30-year mortgages on new construction and bloated the RRSP homebuyer grab to $120,000 per couple.

Concurrently, Ottawa has seriously upped the capital gains inclusion rate on every investment asset save residential real estate. So, guess where more bucks will be flowing in the future? More dumbness.

Well, what’s the current thinking on rates?

Here are the expectations using the implied Canadian Dollar Offered Rate (CDOR) movements and probabilities based on BAX prices. In other words, what does Mr. Market think Tiff is gonna do?

The chances of a first cut of 25 basis points occurring in June sit at 74%. So, best plan on that happening. Further out, the betting is 50% that another quarter point will be shaved off in September, bringing the bank rate down to 4.5% and the bank prime to 6.7%.

By March of 2025 there’s currently an 86% chance the CB will slice another quarter point off, and a full-point drop (to 4%) will not occur until the autumn of next year (94% odds). So, clearly, rate expectations have been trimmed as the world steeps in volatility and, especially, as the US economy outperforms expectations.

This means the Fed will be higher for longer, while our CB lowers first to head off negative economic growth. As boss Jerome Powell said last week. “The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence”. Just months ago the consensus of economists was for 125 bps of easing this year. That has now turned into just 40.

So, Mr. Market expects no change in June (83%), no change in July (57%), and maybe quarter-point drop in September (46%) and again in November (42%).

The American economy has surprised everyone, with 3% growth, full employment, rebounding profitability and over 20 new record stock market highs. Inflation is running hotter than in Canada and there’s consequently less pressure on the central bank. Complicating things is that weird presidential election – making Powell very cautious about any move that may be seen as political.

In short, it’s inevitable rates will drop. But not quite yet. Canada is also expected to see lower lending costs first. Combined with government desperation to encourage buyers, increase demand and push investment bucks from financials to real estate, the case for more house-buying remains strong.

And that sucks.

About the picture: “The “ferocious beast” picture in Thailand that you posted last week,” writes Alan, “prompted me to offer this picture taken outside a dog boutique (Feine pfote = Fine paws) in Linz, Austria while on our recent Rhine cruise (paid for out of our GT inspired b&d portfolio!)  Thanks for the great daily reads.”

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