The fizzle

A month ago mortgage brokers were whispering to borrowers that they should go VRM. ‘Mortgage rates are coming down bigly in ’24,’ they said. ‘Take the variable rate and you’ll win.’ Even though the advice meant paying a sizeable premium for a year or so.

Well, that was ancient history.

Now homebuyers hunting for a fixed mortgage should, “lock that rate in like it’s the last lifeboat on the Titanic,” says mortgage lender, blogger and digital dude Rob McLister. In fact it looks like the price of a five-year loan is going to be higher next week – which suggests Rutting Season 2024 for the house-humpers may turn into the same damp, limp thing that crawled out of last Spring.

What happened?

Well, first, here are the latest odds on what the Bank of Canada will do next, now that bond yields are snaking higher on the back of surprising US data. Traders are pricing in two cuts for our CB this year, down from three.

The implied odds are 61% that Tiff will chop a quarter point off the current 5% policy rate in June. The chances of rates in general being a half-point lower by September have declined to 41%. Then the betting is 71% a third cut will take place by March, with a full 1% decline not happening until December – of 2025.

Yup, higher for longer.

Meanwhile, what about the Fed? After all, our bank generally follows the American one over 90% of the time, so data from south of the border must be seriously considered. After yesterday’s stats dump in Washington, traders see the first cut in that country being pushed back to this December. Yes, after the historic, explosive and globally-critical American presidential election.

We now know the US economy cooled faster than Chrystia’s popularity in the first quarter. Growth of over 3% in late 2023 crumbled to just 1.6% this year. Meanwhile core inflation went up. On one hand the drop in growth shows the Fed’s higher-rate policy is working in dampening consumer demand and piddling all over the real estate market. But on the other, says BMO Economics, “work to vanquish the inflation monster is nowhere near complete.”

Meanwhile, Canada is not the only place where housing angst bubbles over. The average long-term US mortgage rate has jumped again over the pivotal 7% mark – now at 7.17%, compared with 6.4% a year ago and 5.1% two years ago. These are for thirty-year loans, while Canadians must renew theirs at current pricing every five years or less.

And though we little beavers dream of 30-year rate lock-ins, those decades-long loans are directly responsible for a dearth of listings and higher prices than would otherwise be the case. “That large gap between rates now and then has helped limit the number of previously occupied homes on the market,” US reports explain, “because many homeowners who bought or refinanced more than two years ago are reluctant to sell and give up their fixed-rate mortgages below 3% or 4% — a trend real estate experts refer to as the “lock-in” effect.”

In Canada we see similar fears at work. Homeowners are reluctant to list and sell, since they’ll be forced into buying at near-peak prices and at rates which have effectively tripled since Covid. The inventory of available new and resale homes continues to climb – as it does every Spring – but at a slower pace than normal, and now amid decreasing demand. Next week’s bump-up in fixed mortgage rates will simply disqualify more potential buyers.

Meanwhile, we’re hearing reports of ‘chaos’ and ‘panic’ in cottage country since the federal budget’s capital gains tax bomb last Tuesday afternoon. People who have owned secondary or recreational properties for years – or decades – with serious jumps in valuations, are now subject to an inclusion rate of 67% above $250,000 (and 50% below that threshold), after the June deadline.

Lots of them are bailing, hoping to minimize the tax pain. In the city, realtors expect to see s similar tsunami of listings as people flee from investment (rental) units that have gained in taxable value. Besides, who wants to be a landlord anymore when tenants stop paying rent, refuse to move, cannot be evicted, and it takes a year for bureaucracy to react?

Well, it’s a mess. Soon we will move into the next phase. More ugly coming.

Stay liquid.

About the picture: “Here you go, Garth,” writes Larry. “A couple of dogs really roughing  it. On the couch we have Elsa (yes named after the character  in frozen) a mix of Berneses and Great Pyrenees and 9 yrs old. On the floor we have Luna, a 7 yr old rescue dog. Both ladies enjoying life.”

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