Get ready

Because predictions are hard, there was no post telling you exactly what 2024 will bring. Dunno. But it will be exciting.

Ukraine. Gaza. Trump. The Eras Tour. AI. The climate. Xi. Political extremism. How can anyone forecast anything?

Except interest rates. We’ve all got that nailed.

Despite the belief of burn-it-all-down PP fanatics on this pathetic blog and the bring-on-deflation/depression house-horny kiddos, this year won’t be one of rate crisis. No mortgage renewal cliff. No more interest increases. No mass defaults. No housing crash. In fact both sales and prices will finish 2024 higher than they sit today. Even with (shudder) President Trump, Vlad marching into Kyiv or Taylor Swift marrying some jock baller.

Those rate/real estate projections come from major economists, the big banks and (of course) the housing industry. There’s actually a lot of consensus, and also logic.

But why would CBs start to back off on rates in 2024 instead of keeping the hammer down and forcing inflated asset values (aka your house) to correct?

Because they want a soft landing – inflation drifting back down below 3% without a contraction in the GDP or a spike in unemployment. Nobody is rooting for a recession. Policymakers want public debt charges to go down, not up. They desire less consumer spending on servicing loans and more on goods and services. Rates went up hard and fast to kill 8-9% inflation, and it worked. Now we slowly climb back down the mountain.

By next year most of the Big 6 banks believe the CB rate will be about half the current level (5%). We’re not going back to 1.5% mortgages, but 3% loans are entirely likely in 2025. Already that full one per cent plunge in the yield on Canada 5 bonds has taken five-year home loans into the 4% range (if you shop hard) – and this means the stress test will also be heading south over the next six months.

Remember: this tightening cycle was one of the most aggressive in modern history. The Bank of Canada rate swelled an incredible 1,900% in a short (18 month) period of time. Chopping Canadian inflation from 8% to 3% is one of the major central bank victories of our time. Any suggestion Tiff Macklem, the BoC boss, be fired would be the epitome of ignorance, or political deceit. And it won’t happen.

So what’s up?

Here, courtesy of Canadian Mortgage Trends, is a compilation of where the economics departments at the largest banks (who happen to employ the best economists) believe rates will be at the end of this year, and at Christmas, 2025. As you can see, the eggheads think rates will drop between 1% and 1.75% this year, and a further 75 pbs to 1.5% in 2025, just in time for the Canadian federal election. There’s no other way to put it – this is a big unwind.

	Target Rate: Year-end ’24	Target Rate: Year-end ’25	5-Year BoC Bond Yield: Year-end ’24	5-Year BoC Bond Yield: Year-end ’25
BMO	4.00%	NA	3.20%	NA
CIBC	3.50%	2.50%	NA	NA
NBC	3.25%	2.75%	2.60%	2.85%
RBC	4.00%	3.00%	3.30%	3.20%
Scotia	4.00%	3.25%	3.50%	3.50%
TD	3.50%	2.25%	2.90%	2.60%

Source: Canadian Mortgage Trends, Turner Investments

What are the implications?

In the ensuing 12 months – and likely starting within the next six weeks – more houses will be listed and sold. Mortgages that were 6%+ a year ago will universally be 2% cheaper in a few months. Prices are sill ridiculous, but the combination of rutting season and four per cent money will save the species known as ‘realtors’ from imminent extinction.

Forecasts for sales increases range as high as 9.4% (RBC). Prices could increase in 2024 anywhere from 0.5% (TD) to 5% (CREA). Of course, that’s a national number. In the big, steamy major markets things could look quite different.

As for renewals, meh, not to worry, they say. About $250 billion in mortgages comes due this year and $350 billion in 2025. The average rate is now 2.85%, so if these folks are refinancing into a 3-4% world, the hit is probably sustainable. The Bank of Canada says 40% of all mortgage-holders have already renewed – and we know the default/power-of-sale/foreclosure stats are puny.

When will interest cuts occur?

Unknown. Markets give slim odds to a drop this month. Those chances soar once we get to the end of Q1. This blog has wagered April 10th will be the lift-off date. Most economists are comfortable with 2-3 cuts forecast for H2. In any case, bond yields have telegraphed the looming haircut, and mortgages are being priced accordingly.

Is this all good news?

Sort of. Economic activity will increase as the housing market revives. It’s a big chunk of the GDP.

But we’re in dangerous times. The rate escalation did not have a cleansing impact on valuations. The RBC affordability stats presented here in recent days bear that out. Average families cannot afford average houses. The multi-pronged government approach hasn’t worked. Nor do opposition leaders have any different plan (see yesterday’s post). Now with a rate reversal about to occur, it’s clear that (a) sales will increase and (b) most people can’t buy. But markets can bounce higher on thin activity – which is the expectation.

The result: two classes of Canadians. The wealth gap yawns ever wider. Generational warfare ensues. Then, the inevitable as pissy Mills and Zs form government. Net worth taxes. Oh boy.

About the picture: “Garth, just a quick note to thank you…for being you,” writes Barb in BC. “And for injecting common sense and humour into an ever-changing and confusing Canada, if not the World. Here’s a photo of our 9 year old grandson with his new best friend, Echo, now just over 6 months old.  Grandson is an only child, so she’s his sibling and they’re inseparable!  Lovely to see their “connection” is so strong.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.

Source: https://www.greaterfool.ca/2024/01/02/get-ready-3/