What if…?

For more than 60 days it sat there. A few showings. No bids. Then, on day 63 – last week – an offer landed. Then another, unexpectedly. And a third three hours later. The non-descript house in Outer Bunnypatch sold that evening for fifty grand over asking, at a buck and a half.

“Buyers are coming out of the woodwork,” said one of the agents involved, a guy who normally works mid-town in the City. “Things really took a turn last week.”

Regular blog addicts will recall a blasphemous post here days ago listing the reasons realtors and house-floggers think it’s impossible for property values and sales to continue a descent into 2023. This will be the year of recovery, they insist. You were warned.

Of course, many are disbelievers. We’re not even back to BeforeTimes pre-Covid levels, they say, and real estate was already insane in 2019. When average people with two good incomes and savings in hand cannot afford the average house, how can the market be robust? With the stress test north of 7% and the regulator about to make borrowing rules worse, who the hell is buying?

Here’s the conundrum. It could be worth hundreds of thousands of dollars.

If prices inevitably fall further – especially in a recession – a purchaser now would be grasping a falling knife, spending oodles more than prudent. Buyers would be losers. But, but, but. If recent substantial declines are all we get (as central banks stop rate-hiking, leading to a market rebirth) an opportunity will have passed. Maybe forever. Waiters would be losers.

Here’s what we know.

Prices:
The decline from the 2/21 Peak House moment has been substantial. Not historic, but close. The average national valuation dropped 12% year/year by last month (a record) and the plop since last Spring is a consequential 23%. In Toronto the average detached has dropped 22%. In the Fraser Valley, it’s a 30% reduction. Halifax has seen a big whack in the past eight weeks. In the whole GTA (six million souls) detached houses which sold (on average) for $1,797,200 in February of 2021 are now $1,384,500. The difference: $412,000, or 22.9%.

We may argue that a 50% drop is required. But is it realistic to expect in a country where political leaders still coddle homeowners, subsidize 20x leverage loans for property and make real estate the only tax-free asset class?

So, isn’t a drop of more than 20% in less than 12 months a gift? Or merely a harbinger?

Sales:
The other big story is a collapse in sales during the second half of 2022. Volumes have never declined this far for this long this fast in modern history – off between 40% and 50% in most major markets. As the CB raised rates seven times and mortgages went from 2% to 6%, buyers wilted. Pre-con deals immediately looked in jeopardy. Mortgage brokers started taking in laundry. Over a third of all agents in Toronto were assumed unable to pay their annual licensing fee. Months of inventory shot higher, even as listings were scant.

In Canada last year, there were 168,000 fewer resales. So did all the people who want houses stop wanting them? Or did they just move to the sidelines to sit on their insatiable pent-up demand?

If the former, more price and sales drought lies ahead. If the latter, we’re headed for panic buying.

Rates:
The pathetic Blog has long argued the inverse relationship between the cost of money and the cost of houses was the one thing to keep an eye on. Not Chinese dudes or other offshore meanies. Not flippers or amateur landlords. Not REITs snapping up inventory. Not AirBnB. Not citizens from other provinces. Not folks who own residences they don’t sleep in 180 nights a year. And not because Canada has too few homes for sale (there are currently 202,300 resales available).

Nope, it all about rates. And we have news on that front.

First, the Bank of Canada will hike again this week, but only by a quarter point and (most economists think) for the final time in this cycle. We’re done. This is it. The ‘terminal’ rate will top out at 4.5%. That will bring stability to everything. Moreover, long-term rates have been falling in the bond market on expectations of a soft landing and CB surrender. Five-year mortgages are reflecting that – and are set to decline further.

Meanwhile here is what Mr. Market thinks central banks will do over the next few years. Yes, rate reductions.

If that inverse ratio of rates/houses holds, you know what to expect. But if houses are simply unaffordable for all but the fortunate few, will the correction continue nonetheless?

The economy:
A recession this year? Don’t count on it. The latest consensus forecast for the US economy is expansion of 2.6% – not even close to the two quarters of negative growth required for a technical recession. Inflation has come down consistently over the past six months, The labour market is robust. In fact, all those tech layoffs announced in recent days (Google, Amazon etc.) are good news – part of the desired impact of higher interest rates. The economy is cooling, not chilling. The kiddos will get over it. Good experience.

Meanwhile, says my Scotia economist bud Derek Holt, American consumers are frisky.

US consumers’ debt load has been wound back to levels that we have not seen in twenty-two years (chart 8). Twenty-two years folks! A combination of working off the excesses leading into the GFC and regulatory changes have driven improved health of household balance sheets not to fully skirt the tightening of monetary policy, but to adapt to it perhaps in healthier ways than expected. And let’s not forget that existing mortgage debt has overwhelmingly been financed at the 30-year mortgage rate in a very different mortgage market than many other parts of the world where households have a one-way option to refi only when rates are falling and only at a glacial speed when rates are rising which the 30-year mortgage rate stopped doing over two months ago as it fell back by nearly a percentage point from the peak.

So the market signals: soft landing. It also says 150 beeps of rate cuts will start later in 2023. In Canada, we created over 100,000 new jobs in a single month. The unemployment rate is just barely above the all-time low. Inflation has careened from over 8% to near 6%. And the odds are for a 2% rate drop coming over the next year. The CB, after Wednesday, will be resting.

These are facts. In a rational world, houses would fall more, to the point of affordability for most people. We are not rational.

About the picture: “Hi Garth: Was wandering about Hanoi this morning with my wife Evelyn,” writes Peter, “and came across this  Doggie Mobile. Thought of you!  We celebrated Lunar New Years last night in Hanoi.  Next up a two week  ‘ Apocalypse Now ‘ Mekong River cruise.  Happy New Year.”