The storm

The pressure s building for lower interest rates. Like, way lower.

A new Bay Street report (from economist James Orlando, of TD) says Tiff will crash his policy marker from 4.75% now down to 2.25% by the end of next year. The economy needs that, he argues. Consumers are struggling. Public debt charges are crushing. Besides, cutting aggressively would give “a big tailwind” to the Canadian economy as our central bank gets way out ahead of the US Fed.

That would mean the prime rate at the banks would fall to less than 4.5% (it was 7.2% two weeks ago). Mortgages would be widely available in the 3% range.

Here is some evidence why some econs are starting to lose their shorts over rates. Look at the housing market. It’s headed for a wall.

In the mighty GTA, for example, new home sales are down 71% year/year. In a massive market of more than six million, only 935 new units sold last month – just over 500 condos and fewer than 400 single-family homes. A disaster. The condo collapse is 75% compared to last May. Sales of SFHs are down 65%.

Says the industry spokesguy, Justin Sherwood: “We’re quite concerned. We’re hearing it daily now from our members that just nothing is moving. In a year, year and a half, you’re going to be looking at price appreciation and less choice.”

He’s right. We’re in the process of setting ourselves up for some kind of real estate reckoning. Buyers are not buying because mortgage rates are too high. Prices can’t fall much – even in the face of wilted demand – because of the cost of land, development charges, construction financing costs, labour and building materials. The average new condo now sells for a million. A SFH is going for, on average, $1.6 million. Pre-con sales have tanked. Projects are being put on hold, or cancelled forever. Inventory is building.

At the moment there are 20,427 new units for sale, almost 17,000 of them being condos. It’s enough supply, at current sales levels, to last until Thanksgiving of 2025. This is why builders are packing it in. And why we have a rough time coming.

As interest rates start a meaningful decline, demand will rise. Not just for new-builds, but also resales – where inventory has also bloated. Active listings in this market a year ago sat at under 12,000. Today they approach 22,000 – an increase of 83%, while sales are cratered by 22%. This makes a lie of political claims that houses cost too much because demand is exceeding supply. That’s the fiction of every level of government, and they’re sticking with it.

So rates must fall. If not, you can kiss the real estate development industry adios. You can also count on a commercial real estate meltdown in the heart of many downtowns, already suffering historic vacancy rates. Ditto for federal finances, as we head for a never-before-seen $60 billion a year in interest charges on the national debt. No government – Lib or Con – can balanced a budget while that burden exists.

And when rates fade buyers will come rushing back to real estate after more than two years of pent-up demand. At that point – with those 3% home loans restored – demand could swamp supply (as the builders are warning us now), and prices will be seriously under pressure.

“Right as interest rates start to come down to a point where people are going to be jumping into the market, we’ll have less supply,” Sherwood adds. “It’s going to mean such a gap in the market.”

Another bank economist, Rishi Sondhi, is forecasting a housing market recovery later this year as the CB drops rates once, maybe twice. And she says it could get out of hand.

“The potential for an upside surprise to price growth remains if yields continue to fall as we anticipate,” she says. “Recent history has shown that markets can be highly reactive to favourable developments on the rate front. For example, Canadian average home prices surged in the spring of 2023, after the Bank of Canada temporarily paused its rate hiking campaign.”

And wait. There’s more to worry about. The Bank of Mom – along with the swelling price of a sheet of Gyproc and DeWalt tools – is directly responsible for houses people can’t afford. Worse, it is augmenting the wealth disparity that lies behind much of the political change about to sweep across the western world. Bad Mom.

A new CIBC report says Ontario parents are showering an average of $128,000 on their spawn for downpayments, while in BC that jumps to an astonishing $204,000. Close to one in four buyers is being subsidized by family money. Instead of going on strike against crazy asking prices in the resale market, the kiddos are jumping in and paying vendors, since it’s the Bank of Mom making it all possible.

In just five years, figures the bank, these parental subsidies have increased by 52% in Ontario and 90% in BC. “Importantly, this phenomenon is helping to mitigate the bite of housing inflation for buyers, but unfortunately it is also contributing to a widening of the already-wide wealth gap in Canada.” In other words, wealthier families are shoving their kids into expensive homes while the rest of society finds home ownership ever more remote. It is a formula for, well, trouble.

It’s also a guarantee prices will remain elevated and, as rates diminish, help push them higher.

None of this is good news is you happen to be a kid from a middle-class family wanting your own digs. It’s also unhappy if you’re a prime minister chewed up by the polls. Or a homebuilder without clients. Or someone who’s been sitting on the fence waiting for the market to collapse.

The perfect storm approaches.

About the picture: “An evening walk with my standard  poodle, Lexi,” writes Greg, “here in Southern Saskatchewan. I really appreciate your perspective . Have learned a lot and give my food for thought.”

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