On fire

She’s a veteran realtor plying the mean streets of the GTA in her Range Rover. Her latest note came yesterday.

“What a time to be alive. The real estate market has exploded. I am working 16 hour days seven days a week (not complaining), but no down time,” she says. “Inventory is so low and buyers have come out of their comas. Though I think when the BOC drops the rates, we’ll have more inventory and it won’t be as chaotic as right now.”

As you know, the CB hit the pause button again a few days ago. And this morning’s jobs report explains why – and what comes next. (More on that in a few paragraphs.)

Our realtress continues. The market may be hot, but it may also not be healthy.

“I’ve been busy with power of sales (something I specialize in) and something many agents need a course in! I suppose it’s taken a few years for these power of sales to hit the market but they are here (with no representations and warranties of course). Like I said, what a time to be in real estate – from dead to on-fire in a matter of a few months!”

Yes, there are more distressed sales hitting MLS. As Equifax stated this week, mortgage delinquencies have shot higher (but Canadians are notoriously loathe to default). An increased number of people are walking away from properties – especially pre-con buyers never serious about closing. Some thought they could flip an assignment sale and make bank. But not any more.

For example, a developer in Windsor is suing dozens of buyers of single-family homes who have walked away from properties they agreed to pay up to $970,000 for two years ago. As home loan rates shot higher, appraised values dropped and many buyers failed to qualify for mortgages. Now they’re being sued for damages, while the houses go back on the market for up to $200,000 less than the original sale price. The combined toll will be staggering.

This is what high rates have done. Last year mortgage interest costs – a major component of the national inflation rate – jumped almost 24%. Meanwhile there’s evidence everywhere of a slowing nation. The GDP-per-capita rate has been in decline for the last year and a half. Nominal growth here is less than one-third that in the US. Truckers, couriers, installers, shippers – those on the leading lip of the economy – are thrashed.

Some people are saying the Bank of Canada has overdone it. Rates, they argue, have exacted a huge toll and must come down. Now.

“It’s really unfortunate that Tiff Macklem… is basically willing to ignore the fact that there is a unique time, a very nuanced time where rate hikes cause inflation and therefore rate cuts cause disinflation. And the Bank of Canada should be cutting rates to bring inflation down,” says investment firm strategist Jim Thorne. “The private sector is starting to buckle under the force of the Bank of Canada having their foot on the throat of the private sector. They’re late and they should be cutting and they’re not. Which is very concerning,” he told BNN (which you should never watch).

Okay, so how about that employment report this morning? With 48,000 new hires in February, the economy churned out twice the number of jobs that were expected. How can we have more positions created and yet a slowing economy?

Simple. There were 83,000 more people in the workforce last month and half as many more jobs. So the unemployment rate jumped to 5.9%. The ranks of the jobless have recently grown by 200,000 folks. The employment rate has fallen for five months in a row – the longest stretch since the economic crash of 2009.

“The main point is that even seemingly solid job increases are not keeping pace with torrid population growth,” says BMO Economics. “In turn, that is beginning to take some steam out of wage pressures.”

And this: “It’s staggeringly clear that the results are flattered by ongoing massive population gains, and the labour market is thus actually gradually cooling. The steady back-up in the jobless rate, and a pullback in the vacancy rate (reported elsewhere) suggest that wage growth will eventually cool. On balance, this will not change the Bank of Canada’s worldview.”

The economists at TD agree. The jobs report was just more evidence that high rates have done the job, and will soon be reduced. “Odds of a June rate cut holding firm,” it says.

What to make of all this?

Clearly it’s a country in transition. High rates have taken a juicy bite out of family finances and economic activity. They’ve caused distress among those who gambled and lost on real estate they probably couldn’t afford. Inflation has been falling, but may not drop further until the high cost of debt is reduced. The CB is in a tough spot. Rates must decline or the economy risks being tipped into recession – which will spike unemployment in a country with a blistering rate of population growth.

So, yup, Tiff has scant choice. If there’s no rate decline on April 10th, it’ll surely occur two months later. In the interim there are enough buyers with equity, cash and confidence to move real estate values higher amid augmented sales. It may not be a boom, but odds are the wealth gap in Canada is about to yawn wider.

Especially after June the fifth.

About the picture: “Hi Garth, Please see Pablo and Picasso our next generation of adopted rescue kittens,” writes Chris in Ontario. “Four months old from same litter….1 mother: 2 fathers! Cheeky devils Hope to see you in the core or NOTL one day!”

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