That sucking sound

On cue, the Fed raised its benchmark rate today (half a point). Last week the Bank of Canada did the same. And while inflation’s getting spanked, there’s more to come. Maybe a half point. Maybe more. But that’s not the biggest news.

It’s duration. This is not a blip. Rather it’s a return to normal. Normal for Boomers and their kids. But for the Mills and Zs, it’s homeageddon. The propertyapocalypse. The end of days. Never in their wildest did the kiddos think this could happen to the cost of money.

Although interest rates went up fast, they’ll not be declining quickly. Or ever, maybe. We’re still sitting below the historic level for borrowing costs. And the CB rate continues to be less than prevailing inflation. So until the CPI (now 7.1% in the US) is below the Fed rate (4.5%) there’s zero chance the bankers will cut soon. Maybe in 2025.

In short, mortgages will cost 5% or more for years to come. HELOCs will be 7% and higher. Thus house prices must fall more, since affordability is worse than it was when a home loan was kicking around for less than 2%.

Nobody believes this, unfortunately. So while 2023 will probably be a great one for liquid portfolios (rate hikes pause, Zelensky wins, China recovers, profits rise), we’re staring into the jaundiced eyes of a savage real estate beast. Making it worse are a raft of new hits on property – empty house tax in Toronto, big hike in YVR, 25% anti-Chinese tax in Ontario, federal foreign buyer ban, anti-CFA levy in NS etc. In short, next year could well be the worst twelve months for real estate in the lives of anyone under 40.

‘The math of payments doesn’t work’

As crusty mortgage broker Ron Butler continues to point out, prices are falling so buyers should be snorfling those deals. The fact sales have collapsed 50% tells you one thing: “at today’s mortgage rates the math of payments doesn’t work.”

As a result, Bank of Mom loans and co-signings have faded fast. The flippers are gone – just as the feds legislate a new anti-flipping tax. (Sell within a year and any profit will be taxed as income. Ouch.) Pre-con condo buyers have gone from being a dominant market force to a memory. The assignment market has collapsed.

What can save houses?

“Unless the BoC drops rates much earlier than expected OR government makes mortgage rule changes they have not really signaled so far,” says Butler, “nothing will cause Canadian RE activity or prices to increase in 2023. Nothing I know of.”

This brings us to Phil. Mr. Soper is the boss over at Royal LePage, where the real estate marketing giant told media this week that the total price decline of an average home in this nation next year will be… (seriously)… 1%.

“In an era characterized by the unusual, this correction has not followed historical patterns,” he explains. “While the volume of homes trading hands has dropped steeply, home prices have held on, with relatively modest declines. We see this as a continuing trend.”

But how can this be?

The chief economist at Alberta Central put a few things in perspective days ago. The Bank of Canada hike so far this year, says Charles St-Arnaud, means the average maple household must pay $24,200 more in interest – annually – for the average house ($756,000). That’s two grand a month in after-tax income. And we know for a fact most families don’t have an extra $2,000 every thirty days. And look at income requirements. Yikes. In Toronto a family must bring in $254,200 a year to afford the average place – and that’s up fifteen grand in the last nine months. This is more than double the current average income.

“The Canadian housing market remains overvalued by many metrics and the increase in interest rates over the past year has only made matters worse,” he says. And this is without factoring in (a) more rate hikes which Tiff Macklem told us Monday were a sure thing, or (b) a recession, shallow or not.

Could Mr. Soper’s marketing effort be aimed at goosing sales in a moribund market so his agents can make their Audi payments and send cash to the mothership, rather than giving credible guidance to buyers? Dare we think such a thought? After all, every media picked up the story nd ran with it, unblinking. “Think you will get a house at a bargain price next year?” asked a prominent Toronto outlet in its headline yesterday. “Well, forget that.”

To render houses as affordable as they were ten years ago will take a price reduction of 30-40% in markets like Toronto, Ottawa, Vancouver, Montreal and Victoria. Even Halifax needs a 25% haircut, not to mention the crazy towns of London, Kelowna, Squamish or Milton.

In conclusion, Soper just puckered and sucked the remaining drops of credibility from a struggling sector. Let’s hope few heed him. This is an SBF moment.

About the picture: “This is Teddy. Short for Teddy bear,” writes Bogdan. “He’s 1/2 Great Pyrenees and mixed with Newfoundlander, Bernese and Golden retriever a true mutt but is the most chill relaxed puppy. We think he’s the cutest dog ever and the kids love him. We may be biased but everyone that meets him thinks he’s the cutest. The fluffy hair sure helps. He’s 45 lbs at 4 months and surely on his way to 100 lbs.”