The blowout

In February, pre-Putin, pre-Tiff, post-Covid, when RBC mortgages were 2.7% and we still had a Queen, a detached house in 416 topped two mill. The average sale price, precisely, was $2,073,986. Today that property can be yours for (only) $1,609,077.

In other words, Frank Fomo and his squeeze, Lusty, paid $464,909 than if they’d read a certain pathetic blog and waited for peak house to pass. The drop: 22.4%. So far. There’s more coming.

On Friday the Canadian economy shocked everyone with employment stats showing 108,000 new hires last month. That was almost half the job gains for the entire USA – which has more than ten times the population. And the American nonfarm payroll advance of 261,000 was considered ‘hot.’ In other words, seriously higher interest rates in both countries have yet to do much to slow down the juggernaut.

Said my trader bud Ed Pennock: “Hotter than expected. That’s going to be enough to keep Powell raising rates. Maybe even another 75 bps. Watch the 10-year Treasury. At 4.7% we are back at 2007 levels.”

Yup. Bond yields and mortgage rates are back to ’07 levels. But then – before the Credit Crisis crushed the cost of money – our inflation rate was a puny 2.1%. Today it hovers near 7%. So the central bank, in the wake of the latest employment report, is not backing down soon.

Says the economics brain trust at TD:

Wow. This jobs report checked all the boxes in terms of being a blowout report. Headline job growth surged, and gains were powered by full-time, private sector positions. In addition, hours worked surged, and wage growth accelerated. The unemployment rate was unchanged, but this was due to many more Canadians looking for work – a healthy sign for growth. Notably, bond yields and the dollar are up in the wake of the report. This report also justifies the Bank’s stance that more needs to be done on the rates front, and our current forecast anticipates an additional 50 bps of tightening by the end of the year.

Okay, so another half-point on December 7th. That will take the chartered bank prime to just under 6.5%. Five year mortgages will likely sit at 6%, HELOCs at 7% and VRMs will have travelled from as little as 1.5% to 5.5% in the space of ten months. The stress test could hover near 8%.

Remember the inverse relationship between rates and house prices? Sure ya do. It’s the No.1 determinant of demand, which influences prices. This week we learned that the level of sales (demand) is down more than 40% on a monthly basis in the GTA and Lower Mainland. We also discovered there are over 95,000 condo units under construction in Toronto (supply) as well as current listings of 13,023 in Toronto (up 68% year/year) and 9,852 in Vancouver (up 22%).

The conclusions: (a) there is no shortage of properties available for people to buy. (b) There’s actually no housing crisis, either. Just an affordability one. (c) Real estate will get even less expensive in the GTA and way, way cheaper in places like Richmond, Burnaby, Victoria and North Van. (d) The longer buyers wait, the more they will save.

And what about recession?

Even Chrystia is talking downturn. She did that Thursday while spending $30 billion more and bringing in a brain-dead tax on corporate share buybacks. But given the strength of the job market in Canada and the US or the relative robustness of corporate profits in the current earnings season it’s hard to see a miserable early-1990s-style drubbing on the horizon. More likely we’ll see a couple of quarters of mildly negative growth while the CBs finish their giddy job of removing stimulus. After than, growth trickles back.

So the forecast has not changed.

Another full 1% or so is coming for the Bank of Canada. Then a pause. No cuts. Not even a hint of a reduction in 2023, or 2024 either. While mortgages stay north of 5%, house prices will be under pressure. We’ll be scraping bottom some time next year. Not for a generation (or longer) will home loans again be 2%. It will take a new mess to bring them back.

Will the seeds of that be planted on Tuesday night?

About the picture: “Frogs and dogs be damned!” writes Leslie, objecting to recent beastly blog photos. “Here’s our sassy Red-Factor Sun Conure, Ruby.  She’s checking out my lovely chicken ornament.  She can talk up a storm and dance like nobody’s watching!  It was great spending the lockdown with my best girlfriend. Enjoy the blog, as well as the comments from fellow readers.  It should be interesting in the next few months, perhaps we will all be wearing Ruby’s sideways glance!”