The process

So the dollar tumbled by almost a percentage point Tuesday. Seventy-three and half Yankee cents now. That slide came after we heard about the economy.

Growth came in at 2.9% in the latest quarter. Less than before – no surprise. Vastly higher than analysts had predicted – big surprise. The interesting part: exports, non-residential and business investment were up strongly. Housing investment and household spending plopped. Wage gains fizzled far below inflation. And as spending dropped, saving increased – the savings rate jumped to 5.7%.

Whazzat mean?

Higher interest rates and swelling mortgages have apparently turned the tide. Real estate sales have crashed by a third or 40% in most markets, prices have fallen as a result and there’s more property pain coming as rates rise again in seven days. Remember that this economy is more than 60% driven by household spending – which is fuelled by debt. So when the cost of money rises, when income gains drop and lettuce costs double, people turtle. The economy changes. And this is exactly what the central bankers have been looking for.

Will rate hikes mollify sooner? Maybe. That’s one reason the dollar sold off (higher interest rates attract capital, bolstering a currency – and vice versa). Of course, the tightening cycle is not over yet and unless we get a stinker of a recession next year (not happening) mortgage and bank rates will stay put throughout 2023. It could make for one of the most interesting spring real estate markets in memory, starting in about 90 days. Never before have we had frustrated demand, a 7.5% stress test hurdle and low levels of inventory. If lots more people decide to sell, prices could cascade.

Meanwhile, what’s government doing? Raising real estate taxes exponentially while spending billions to increase the supply of houses. Classic suck-and-blow. Blog dog Shawn gives us a local glimpse into why this is a failed policy:

I started working part time in new home construction in 1994 (for my father) part time for a couple of years and then full time from 97 to 2002 and again 2006 to 2010. Never would’ve imagined this kind of fever pitched frenzy and prices in real estate. I was talking to my brother in law John yesterday – he still works for some contractors around the area where I was raised. John informed me that he estimated roughly 90% of housing developers had offers and clientele just vanish – “it’s like someday just flipped a switch”, he said. Developers tarping over poured foundations, things coming to a complete stand still; one developer even took the For Sale signs off of 5 or 6 houses and started renting them out (because of the lack of offers). This is in the Belleville, Trenton, Stirling area. I think you’re bang on when you said it’s an affordability issue and not a supply issue.

Yes, we are correct. There are lots of houses for sale. Months-of-inventory numbers in major markets are heading steadily higher. Mortgage origination volumes at the big lenders have plummeted. The country’s largest builder has seen sales fall 65% and closed development sales centres. Real estate boards in Vancouver and Toronto report deals have tumbled by about 45% year/year, and are running drastically below 10-year levels. It’s evident there’s more inventory than there are buyers. The market is wobbling because of demand, not supply.

What’s likely to happen next?

The Re/Max puffsters and LePage harlots swear housing will revive in 2023 because, well, because. But this is an unlikely outcome.

First, rates will inflate a little more, then stick. There’s little reason to believe a pivot is coming, and none to believe we’ll return to 3% home loans. The stress test is staying stuck at a level which materially chops the amount of money people can borrow. Second, the economy will slow. Probably not go into reverse, at least for long. But growth next year will be elusive, having an impact on consumer confidence and household spending. Third, incomes will fall further behind inflation as unemployment ticks higher. Home ownership costs keep escalating. Affordability keeps falling.

So the real estate market hasn’t hit a floor. Prices must fall further in order to compensate for mortgage hikes. The fact it’s started was the big news in today’s economic stats. Lots more to come.

Now let’s check in with Matt, newly moved (with his squeeze) from Nanaimo to Victoria.

We sold our house in Nanaimo and now have $800k in the bank.  We are living in a basement suite, which my wife is not thrilled about.  Housing in Victoria is expensive and I think we should wait to buy, but our Nanaimo realtor told my wife that the market is at the bottom and should rebound in 2023. Although condos are a lot cheaper, my wife is set on a house.  How long should we wait?

Your Nanaimo realtor is high on hopium, Matt. Without a serious rate drop (not coming) the housing market won’t jump, even in delusional, self-worshipping Victoria. Give it a year, at least.

And move out of the damn basement, which is only fuelling your wife’s house lust. Also get the eight hundred grand out of your chequing account. Even dumping it into a brain-dead, one-year GIC at 5% will give you the equivalent of $3,250 a month to help defray the costs of renting a whole house while preserving the principal and your relationship. Then wait. Watch. Shop. Be patient.

Like love, this is a process. Let it evolve.

About the picture: “A smart friend of mine introduced me to your blog 3 years ago,” writes Jeff. “and this is Charlie when I asked her for the first time: “want to hear what Garth has to say today?” She was interested for a moment but likes naps and playing with her banana more than advice from a blog. I don’t blame her. Thank you for for keeping a steady hand on the ship, wave after wave. I look forward to learning from your posts daily.”