The pause

The next move for rates?

This week the US Fed will do what our guys did a few days ago – hit the snooze button. No change yet.

But it’s coming. Mr. Bond Market believes there will be four reductions in 2024. The majority of Canadian economists agree. The consensus is still as we reported two weeks ago – a drop in the CB rate of between 1% and 1.5% by Christmas. Or in time for US presidential election, which may well eclipse Baby Jesus since Trump has now declared his divinity.

So God made Trump. That’s good to know. Meanwhile Tucker Carlson drew thousands to events in Calgary and Edmonton last week, in the company of rad Alberta premier Danielle Smith (who wants to take your CPP). Carlson was fired from Fox News for continuously spreading election misinformation and outright lies and has become a Trump surrogate. The cowboys lapped it up. Tucker got rock star treatment. He came to liberate the colonials.

Well, rates and politics seems intertwined at the moment. If they come down as the market expects, it will be seen as a sop to President Biden as he tries to convince people the economy is good (and, actually, it’s close to spectacular). If they stay elevated, the likelihood of a recession increases and financial markets will sell off in disappointment. Overwhelmingly, odds are on the former.

Canada’s bank prime, 7.2%, sits at a 23-year high. Mortgage rates have dipped considerably since the autumn, with a five-year fixed at RBC now 5.14%. Interestingly, a growing cohort of borrowers are going for variable financing, even though the bank’s VRM costs 6.59%. The thinking is that central banks have absolutely stopped their tightening cycle, with a variable-rate mortgage possibly dropping to 5% sometime in 2025, then into the fours the following year. It’s a gamble, for sure, but one finding traction.

Meanwhile housing seems to be in the last gasps of a deep buyer’s market. Months of inventory is rising, especially for condos. Housing starts have cratered again, due to crappy demand and unaffordable construction financing. It all suggests lenders will be aggressive come March, extending loans at pricing we haven’t seen in about two years,

But, for now, realtor despair. Motivated sellers. Buyers in control. If you can make a cash offer with a quick close, you are a god. Not like Trump (he’s special and glows in the dark) but nonetheless divine.

Just look at this pathetic situation.

Last month in all of the GTA (population six million) just 560 new homes sold – all condos save 154 which were detached, towns, links or semis. This was 70% below the ten-year average for sales, and a 59% collapse from the previous month. Yes, December is not exactly a prime time to snap up a new house, but this level of activity is an industry disaster.

There are two things to recognize in this situation. First, this foretells a serious construction drought is coming. Says the industry: “Given that housing starts lag pre-construction sales by as much as two years, we can expect that the low level of sales in 2023 will result in lower housing starts in the future. In fact, we are already seeing the pace of housing starts in the GTA beginning to decline. This will result in less housing supply being added to the market in the near future, aggravating the housing crisis at the same time as we are experiencing increasing demand for new homes.”

Second, inventory is piling up because buyers took off.

Total new home remaining inventory for this one market sits at 20,252 units – 16,850 condos and 3,402 single-family homes. Amazing, when politicians keep yammering about a lack of homes to meet demand. This inventory number includes units built and empty, pre-construction projects and buildings now being erected.

So, given the two-year industry time lag, the latent inventory and the reality of higher sales once rates start to decline, it’s safe to forecast a surplus will turn into a drought some time in 2026. The inevitable will be higher prices, and an end to what we are seeing now. The benchmark price for condos has fallen 7.5% in the past year, while new single-family homes have dropped 8.5% (to $1.6 million).

“The low level of sales in 2023 will result in lower housing starts in the future,” say the builders. “In fact, we are already seeing the pace of housing starts in the GTA beginning to decline. This will result in less housing supply being added to the market in the near future, aggravating the housing crisis at the same time as we are experiencing increasing demand for new homes.”

Thus, we’re sticking with recent conclusions.

The CBs have caved. Rates are coming down this year and housing sales will then rise. The current buyer’s market will flip as inventory swells while the SNLR rises and DOM tanks. What happens to prices is an open guess. But is the outcome of the biggest single global event of 2024 – the American election – preordained?

Let us pray.

About the picture: “Our beautiful boy Jax just passed at the too-young age of 7, writes Farid. “An auto immune disease that snuck up on him. We are having a hard time dealing with his passing however we have so many great loving comical memories that are helping the kids and us get through it.”

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