Rate Cuts & Recession Debates: Canada's Economic Crossroads

[00:00:00] Welcome to the Canadian Real Estate Investor, where host Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio.

[00:00:12] In case you don't follow any realtors on Instagram, we're going to share some apparently breaking news with you.

[00:00:21] The Bank of Canada cut interest rates by 50 basis points.

[00:00:25] This is now the fifth consecutive cut and the second jumbo rate cut that we've seen from the Bank of Canada.

[00:00:32] And there also seems to be a bit of a disagreement between the Bank of Canada's past governor, Stephen Polos, and his successor, Tiff Macklem, on whether or not Canada is at risk of a recession.

[00:00:43] Thank you for informing me of that, Dan. I actually am probably one of the only people that doesn't follow any realtors on Instagram, so this is the first time hearing about it.

[00:00:52] We're also going to be discussing a few other things, including why they did that, and maybe some of the contributions like employment data and inflation that affected and impacted that decision.

[00:01:06] And of course, the impacts on the housing market, and maybe a little pat on the back that they received in that regard.

[00:01:14] We'll also discuss how the US Federal Reserve may not be following the Bank of Canada's lead with comparable cuts.

[00:01:23] Yeah, so the interest rate policy is now 150 basis points below the US policy.

[00:01:29] This is the largest rate differential since 1997.

[00:01:33] Remember how in the past we talked about comparisons to the 1990s recessions in a few episodes?

[00:01:38] If they don't follow with cuts, we could end up with a bit of an issue, and we'll talk about why this could have impacts on the Canadian dollar.

[00:01:46] So I guess with that piece, we'll also dive into a special report that I did for Valerie.ca entitled Strong Dollar Versus Low Interest Rates, What Canadians Really Value.

[00:01:56] Yeah, and when you talked about the 1990s, Dan, it's really one of those things that people want to pay attention to if they want to understand how to make real estate investment decisions today during Canadian economy right now.

[00:02:13] But before we get there, let's start with some commentary about the real estate from the Bank of Canada during their press release.

[00:02:19] So the Bank of Canada claims that the housing market gains momentum without fueling price inflation, which they're calling a win-win for both buyers and the economy in general.

[00:02:31] The latest press conference held Senior Deputy Governor Carolyn Rogers highlighted a noteworthy and positive development in Canada's housing market.

[00:02:42] That's what we like to hear.

[00:02:43] So while home sales and overall housing activity are on the rise, the uptake has not been accompanied by a surge in property prices.

[00:02:53] In other words, the housing market is picking up speed without stoking inflation.

[00:02:59] This is precisely the kind of healthy growth that both policymakers and investors and homeowners and industry professionals alike should be welcoming.

[00:03:09] Now, the question is, are they correct?

[00:03:12] Well, you'll have to tune into an episode later this month with our meetup host from across the country where we'll see what is happening in each market across the country.

[00:03:23] And I'm just going to do a little plug right here.

[00:03:25] Join the meetups, guys.

[00:03:26] We are almost at 5,000 people strong across 24 cities across our beautiful country here and just growing like crazy.

[00:03:35] Go ahead, Dan.

[00:03:36] Yeah.

[00:03:38] Yeah.

[00:03:38] So, you know, they talk about the market picking up speed.

[00:03:41] You know, I always notice there's like this linguistic challenge that people have with the real estate market in Canada.

[00:03:48] And you can't say that the market is doing okay or, you know, like the market is stronger without people thinking you're saying that prices are going up.

[00:03:58] And so I think that there's two very different things going on here, right?

[00:04:02] One is the market is recovering.

[00:04:04] And I talked about this at our holiday party.

[00:04:07] The real estate industry has been in recession for the past two years, right?

[00:04:11] Volumes have been very low.

[00:04:12] There's not a lot of houses trading hands.

[00:04:14] Commissions are low.

[00:04:16] Real estate professionals aren't making a lot of money.

[00:04:18] Renovators, contractors, et cetera.

[00:04:20] All of those tertiary industries are impacted.

[00:04:22] Now that rates are coming down, if we go back to that HOPE acronym from economist Michael Cantrell, housing is the first thing to be impacted by any changes in interest rates to the upside or the downside.

[00:04:33] And so now that we're at the downside part, you would start seeing the real estate economy recover more quickly than others.

[00:04:40] And that doesn't mean house prices are going up.

[00:04:42] It means that the number of houses selling is going up.

[00:04:45] And that's what the Bank of Canada is saying here.

[00:04:47] More homes are trading hands, but prices are staying grounded.

[00:04:51] Typically, when we talk about a rise in housing market activity, there's an expectation that prices will follow suit and climb sharply.

[00:04:56] However, according to Bank of Canada Deputy Governor Carolyn Rogers, the recent increase in buying and selling has not resulted in any significant upward pressure on home prices.

[00:05:06] Instead, we're seeing a more balanced scenario.

[00:05:08] More Canadian families are finding homes that suit their needs, but without runaway costs.

[00:05:13] This is, I would say, a pretty significant achievement for the Bank of Canada.

[00:05:18] I don't know how long it'll stick around.

[00:05:20] But for some time now, policymakers have obviously been very concerned about housing affordability.

[00:05:25] High prices can lock many first-time buyers out of the market.

[00:05:28] It can kind of eliminate that dream of homeownership.

[00:05:31] It can fast-track your transition to a renter's economy.

[00:05:36] And excessive price growth can also contribute to overall inflation, making it harder for Bank of Canada to maintain stable prices, which is their primary mandate.

[00:05:44] High property prices also create significant barriers for real estate investors looking to provide rental housing.

[00:05:50] And we need more rental housing in this country.

[00:05:53] When purchase prices are too high relative to potential rental income, the returns on investment become unfavorable.

[00:05:59] This would lead to fewer rental being built.

[00:06:03] You'd see reduced conversion of existing properties into rental units because it'd be too expensive to do that, either material-wise or buying the deal, like buying the actual property.

[00:06:12] And this would ultimately constrain rental housing supply.

[00:06:15] And it would make that existing problem a longer-term problem.

[00:06:19] So, because investors require adequate cash flow to cover mortgage payments, maintenance costs, you know, and make some cash, like, you know, cash flow, etc.

[00:06:28] Excessive property values can also make rental housing projects further unviable.

[00:06:32] And that's where it materialized in rental inflation over the past couple of years.

[00:06:36] Now we're seeing rents kind of softening a little bit, prices softening a little bit, rates coming down.

[00:06:42] And so, the current situation, more volume in transactions without escalating prices, suggests that interest rate adjustments and policy frameworks are having their intended effect, at least when it comes to the housing market.

[00:06:53] I won't give them too much credit outside of that because I think that they ended up in a little bit of a trap.

[00:06:59] And we've talked about this.

[00:07:00] They had their back kind of against the wall with trying to balance the USD exchange, which we'll get to later.

[00:07:06] But yeah, so that's kind of my thought around the whole thing.

[00:07:10] Yeah, it's really interesting.

[00:07:11] And, you know, it comes back to, for me, investors versus speculators, right?

[00:07:17] Everyone thinks that investors want to see higher prices.

[00:07:21] But I would say that is the key difference between investors and speculators.

[00:07:25] You know, speculation was one of the main driving forces, which got us into the trouble we're in now, right?

[00:07:32] And a speculator is someone who tries to profit from short-term price movements and market volatility, right?

[00:07:38] They think like, you know, a day trader buying assets, hoping for quick price appreciation, having shorter holding periods, focusing primarily on price movements rather than investment fundamentals.

[00:07:52] And they may or usually use higher leverage to amplify those said returns.

[00:08:00] Now, a lot of that speculation, the fundamentals of speculation go against the fundamentals of real estate investing, right?

[00:08:07] So in contrast, an investor takes a longer-term approach focused strictly on fundamentals.

[00:08:13] So when you're talking about real estate, we're looking for cash-flowing assets to generate steady returns, holding properties for extended periods of time, at least for that first five years or longer, right?

[00:08:25] That first classic five-year mortgage term, focusing on rental income and adding value, property improvements, and making decisions based off of market fundamentals rather than, you know, where's the future of this price going to be in, you know, two years, six months, whatever that may be.

[00:08:42] Now, investors certainly appreciate property value appreciation over the time.

[00:08:47] Of course we do.

[00:08:48] It's viewed as a secondary benefit to consistent cash-flowing wealth building through equity paydown, right?

[00:08:55] So that's a win-win.

[00:08:56] Now, this is called the Canadian Real Estate Investor Podcast, not the Canadian Real Estate Speculator Podcast.

[00:09:03] So I think you know which group we're more focused on educating, not just educating, but pleasing as well and hopefully attracting.

[00:09:12] So, Dan, with all that being said, why might this be described by some as a great policy outcome?

[00:09:20] I think that, you know, the whole thing really boils down to price stability, right?

[00:09:25] So, you know, in the U.S., the central bank, the Fed, has a dual mandate, right?

[00:09:29] So they balance both price stability, like inflation rate and full employment.

[00:09:36] We just have a price stability thing here.

[00:09:38] So it's kind of like by any means necessary.

[00:09:40] So that means keeping inflation around that 2% target.

[00:09:43] Housing costs, especially shelter inflation, have been a huge part of that equation.

[00:09:49] We've been not shy to say how much has been contributing to inflation over the last little bit.

[00:09:54] So when homes become more expensive too quickly, it can fuel inflation and push the bank to keep interest rates higher,

[00:10:01] which would cool the broader economy and eventually trickle back into the housing side.

[00:10:05] But it's a delicate balance.

[00:10:06] If the market slows too quickly, it could harm construction, which we're seeing.

[00:10:10] Or I do think we're kind of seeing, we're kind of on the tail end of that, but we are seeing it.

[00:10:14] I think we'll see some more consequences of it when the condo pipeline dries up.

[00:10:18] It can reduce unemployment in that regard, right?

[00:10:20] Because if there's not as much construction, not as many people working on construction sites,

[00:10:25] and then that can have trickle effects into dampening further economic growth.

[00:10:30] Carolyn Rogers suggested in the presser that right now they are hitting a sweet spot and balancing that outcome.

[00:10:38] And I would agree.

[00:10:38] I think as it stands right now, you have a pretty good thing.

[00:10:42] People aren't getting crazy with the housing market.

[00:10:45] There's no absolutely ridiculous activity going on.

[00:10:49] And it seems like a market that there's a lot of activity happening.

[00:10:53] People are benefiting from the lower rates.

[00:10:55] They're easing back into the market, but it hasn't gotten out of control yet.

[00:10:59] Lower borrowing costs are obviously a big part of that.

[00:11:01] They're making it easier for Canadians to finance purchases.

[00:11:04] And that gives them confidence to step into the market.

[00:11:06] At the same time, a stable pricing indicates that supply and demand are not getting out of hand.

[00:11:10] So you've probably seen a lot of demand stripped away by potential population growth changes,

[00:11:15] by potential reduction, maybe household consolidation even, because people are a little bit less wealthy.

[00:11:21] I'd say we're probably in a bit of a recession.

[00:11:23] We'll get to that later.

[00:11:24] And it seems like we're kind of balanced.

[00:11:26] We're seeing enough new listings, reasonable mortgage lending conditions,

[00:11:30] and measured buyer enthusiasm that seems to be helping to prevent an unsustainable price spike.

[00:11:38] Because I really don't think we can afford to get out of control here again.

[00:11:42] Well, I mean, we saw what happened last time, and we're still, you know,

[00:11:46] we're in this situation now because of getting out of control.

[00:11:49] So I feel like we've only been barely in control for, I don't know, a couple months,

[00:11:55] maybe a year at this point.

[00:11:56] So to go back out of control would be crazy at this point.

[00:12:01] Now, Carolyn Rogers did go on to say that she's had a bit of concern recently about some fiscal policy changes

[00:12:09] that quote unquote may be tinkering with the market.

[00:12:14] And that could upset the balance that she believes they have now created.

[00:12:18] So we'll have to see which ends up being more powerful moving forward.

[00:12:21] Now, the senior deputy governor of the Bank of Canada delivered a speech called

[00:12:27] Canada's Mortgage Market, a Question of Balance at the Economic Club of Canada.

[00:12:33] That sounds like a cool club, Dan.

[00:12:35] Are you trying to get a membership there?

[00:12:36] Is that a monthly membership that you can get, kind of like a gym membership

[00:12:39] where you go and do math with each other?

[00:12:41] I'm honestly not sure.

[00:12:44] This is the first time I think I've ever seen that Economic Club of Canada.

[00:12:47] We'll have to do some research on what the heck that is.

[00:12:49] She finished off that with the following conclusion.

[00:12:53] Are you looking it up right now?

[00:12:54] I am.

[00:12:55] I'm going to show you.

[00:12:55] I'll put a slide up.

[00:12:57] Okay.

[00:12:58] You got a picture of Dougie on the front page there.

[00:13:01] For anyone watching on YouTube, Dan's figured out what the Economic Club of Canada is.

[00:13:05] And I guess you're going to, Dan, you may or may not be a member inducted soon.

[00:13:10] So she finished off her statement on the mortgage market and a question of balance

[00:13:16] by concluding with these three points.

[00:13:18] The first is that our mortgage market has, on balance, served us well across two important

[00:13:25] dimensions, financial stability and access to affordable credit for homeownership.

[00:13:31] Canada has one of the highest rates of homeownership and the lowest levels of mortgage default among

[00:13:36] advanced economies.

[00:13:38] So even though we've seen mortgage delinquencies on the rise, we're still very low and still quite

[00:13:45] high, even though homeownership has also been, right?

[00:13:48] Homeownership has been decreasing.

[00:13:50] Mortgage delinquencies have been increasing.

[00:13:52] But we're still pretty good from her perspective on both of those.

[00:13:55] Now, the impact of higher interest rates has been challenging for borrowers as well recently

[00:14:00] and will be challenging for many as many and millions of Canadians go to renew their mortgages in the next two years.

[00:14:08] But policies that discourage too much leverage and encourage strong dynamic underwriting,

[00:14:14] like the stress test, for instance, have proven effective when you look at the experience of the last couple of years.

[00:14:20] She goes on to say,

[00:14:22] Second, when it comes to the mortgage market, there's no such thing as a simple change.

[00:14:27] The distribution of risks across the different players has many effects, including the cost and availability of credit

[00:14:32] and the options and flexibility available to borrowers.

[00:14:35] And third, we need to resist the temptation to try and solve the housing affordability challenge by tinkering too much with the mortgage market.

[00:14:42] And I think this was kind of very specifically aimed at discussing the CMHC policy.

[00:14:48] Housing affordability is a very real challenge to our economy.

[00:14:51] It's encouraging to see governments at all levels focused on this challenge and being creative with the range of solutions they are bringing forward.

[00:14:58] Ultimately, though, improved housing affordability requires better balance between supply and demand.

[00:15:03] And achieving this balance will take time.

[00:15:06] In the meantime, leaning too much on measures that reduce the short-term cost of financing could have long-term impacts on the financial health of households,

[00:15:14] the mortgage market, and the economy.

[00:15:16] This doesn't mean change is impossible, but it does mean change needs to be approached with care.

[00:15:21] It's always worth asking if there's room to improve and the world offers plenty of examples to learn from.

[00:15:27] It's a question of finding the right balance.

[00:15:29] So kind of a little bit of a warning, I think, to what it feels like fiscal policymakers, the government, that is,

[00:15:37] in their, well, I guess the policy will be out by the time this episode is out, December 15th, that you can get CMHC-insured mortgages up to $1.5 million.

[00:15:50] Giddy up.

[00:15:50] Yeah, it seems like she's saying something without directly saying it, right?

[00:15:55] Kind of a little bit of a soft warning there.

[00:15:57] Yeah, I mean, to me, it kind of sounds similar to someone else that we've quoted on the show here a number of times,

[00:16:03] similar to the perspective TD economist Rishi Sandi.

[00:16:07] And Sandi stated that he expects the new CMHC policy increase to have an immediate effect, upward impact on prices in the spring of next year.

[00:16:19] This will make the market unaffordable again and mute future growth after the first half of 2025.

[00:16:26] So that's an interesting and kind of controversial opinion, Dan, because I know you and I have spoken to a lot of different people about this.

[00:16:34] And I think it's probably very market specific, right?

[00:16:39] And I think you're going to speak a little bit about that.

[00:16:41] Yeah, it is interesting, right?

[00:16:42] Like it does feel like it's really a policy aimed at the markets where house prices are over $1 million because it unlocks that extra buying power needed in those markets.

[00:16:53] Outside of those markets, it doesn't really seem to have a big impact on places like Winnipeg, Calgary, Montreal, Ottawa, PEI, Moncton, et cetera.

[00:17:04] I'm just listing those because that's where we had meetup posts tell us that nobody's even talking about this policy change there because they don't need it.

[00:17:11] Like they literally were like, no one's even brought it up.

[00:17:14] I haven't even heard about it.

[00:17:16] Yeah.

[00:17:16] And so it really does seem to be a policy aimed at shifting the demand curve up in Toronto and Vancouver areas only, which is probably not a good thing necessarily because those markets are very much battling the headwind of lack of affordability.

[00:17:31] But it does kind of make sense, you know, from my perspective that CMHC is observing those areas are also going to be experiencing the biggest increase in mortgage delinquency rates, right?

[00:17:46] And basically Toronto and Vancouver markets.

[00:17:50] So a bit of a mess potentially.

[00:17:53] Yeah.

[00:17:53] Yeah.

[00:17:53] Good old Toronto and Vancouver being, uh, being the outliers as usual.

[00:17:58] So you're probably wondering what does this mean for me, whether you are a buyer or a seller?

[00:18:02] Well, don't worry.

[00:18:03] I am about to tell you if you are a buyer, if you are looking to purchase a home or an investment property, this environment is promising for you.

[00:18:11] So more sales activity means a greater variety of homes coming onto the market, giving you a better chance to find the right fit, the right property, the right investment for you.

[00:18:21] And with stable prices, you won't have to worry as much about things like bidding wars that will drive up the cost of your dream home or that perfect investment property beyond your budget.

[00:18:32] And now if you are a seller in this market, right, for those of you considering listing your properties, the increased level of market activity suggests that qualified buyers are out there and maybe ready to make purchases, right?

[00:18:46] Maybe they are finally getting off of those sidelines that we've heard so much about.

[00:18:50] So while you may not see prices soaring overnight, you'll likely enjoy a more steady, reliable demand should this phenomenon continue.

[00:19:00] Price correctly, your home should attract interested buyers without the market feeling overheated and going back to those crazy, ridiculous bidding wars where you're pulling out inspection clauses and that kind of stuff.

[00:19:15] Yeah, I think it really, this is the kind of market, like we've said this for a long time on the show.

[00:19:20] Our guess was that, you know, two years ago, I think after the big price drop, basically, you know, we said this is going to play out very similar to the 90s and we'll talk about the 90s in a minute.

[00:19:29] But in the 90s, house prices dropped very steeply in 1989 and then the market traded sideways for like five years.

[00:19:37] And that's how the incomes caught up to house prices.

[00:19:42] I would say that we're already in a similar setup.

[00:19:45] Prices have basically been sideways for two years at this point since that big drop in price.

[00:19:50] You see a little bit of a grind down and like some markets more than others, some markets see the drops later, earlier, whatever.

[00:19:57] And, you know, along with that, we've said for a while now that there would be a time when rates were getting lower and prices were getting lower.

[00:20:06] And that would present a good opportunity.

[00:20:08] And I think we're finally getting there.

[00:20:11] This isn't to say that, you know, somebody would be calling the bottom, but you can't really call or time the bottom.

[00:20:18] You have to be buying on the way down and bidding below market value.

[00:20:22] That's how the bottom gets created.

[00:20:24] So as it stands right now, prices are falling, interest rates are falling and rents are also falling.

[00:20:30] And that's kind of the challenge.

[00:20:31] So as an investor, you can find properties that cash flow better because you're paying less interest each month.

[00:20:37] But you're also hit with the risk of rents being pulled down by decreased population growth and increased unemployment.

[00:20:44] So the risk now is less interest rate related in the market, and it's more related to your rental income as an investor.

[00:20:52] But overall, the real estate industry is beginning its recovery, not the market, right?

[00:20:57] Not prices, but the industry.

[00:20:59] The market and especially prices typically will recover after the economy recovers, which is probably a while away at this point.

[00:21:06] The government hasn't even admitted that we are in a recession yet, although Stephen Polos has.

[00:21:11] What a rebel.

[00:21:13] I love it.

[00:21:13] And Dan, I really love that distinction between the industry beginning and recovery versus the market beginning and recovery.

[00:21:21] I think that is very important to understand that difference.

[00:21:25] Now, back to the rebel, Stephen Polos, who is the contrarian here saying we're in a recession.

[00:21:32] He is the former Bank of Canada governor.

[00:21:37] So he might know a thing or two.

[00:21:39] I'm going to just quote a piece from here.

[00:21:42] I wouldn't say we're in a recession.

[00:21:44] I wouldn't even call it a technical.

[00:21:45] I would say.

[00:21:46] Sorry, I would say we're in a recession.

[00:21:48] I wouldn't even call it a technical one, says Polos now, who is a special advisor to Osler, Hoskin and Harcourt LLP.

[00:21:56] He said that during a webinar on Tuesday, a technical one is a superficial definition that you have two quarters of negative growth in a row.

[00:22:05] And we haven't had that.

[00:22:07] But the reason is because we've been swamped with new immigrants who buy the basics in life.

[00:22:12] And that continues to boost our consumption just enough.

[00:22:17] So a recession is typically defined as a significant decline in economic activity spread across the economy, lasting more than a few months.

[00:22:26] Now, some traditional indicators include declining GDP, right?

[00:22:30] So declining gross domestic product for two consecutive quarters, rising unemployment rates, falling retail sales, declining industrial production and reduced consumer spending.

[00:22:41] And we have seen every single one of those.

[00:22:43] However, as Polos points out, Canada's situation is unique because of high immigration levels.

[00:22:49] They are masking some of these traditional recession indicators by maintaining consumption levels, even while other economic metrics show decline.

[00:22:58] And that is why his successor, Tiff Macklem, doesn't think there's a risk of technical recession.

[00:23:06] Below is an excerpt from, and this is a direct excerpt from the press release of the Bank of Canada's rate cut decision.

[00:23:13] Governor Tiff Macklem's response to the press conference where he addresses the notion of Canada being in a recession.

[00:23:19] It says, I mean, you know, the traditional definition of a recession is, you know, two, at least two negative quarters of growth in a row.

[00:23:28] This is direct, so that's why I put it in the notes.

[00:23:30] I like how you're reading it as direct.

[00:23:31] No, it's good.

[00:23:32] It's good.

[00:23:33] It's funny because you can feel him kind of tiptoeing and being careful because he got in trouble with the call, you know, during the hiking cycle or prior to the hiking cycle.

[00:23:43] So the Canadian economy is growing.

[00:23:45] Third quarter growth was 1%.

[00:23:46] It's not growing very quickly, but it is growing.

[00:23:49] And if you look at the labor market, yes, the unemployment rate has gone up, but we have not seen widespread layoffs as you would typically see in a recession.

[00:23:56] So now, not only does Tiff not think we're in a recession, but he doesn't think we should be expecting one either.

[00:24:04] Okay, so that's interesting news.

[00:24:08] Below is another excerpt from Macklin's remarks where he explicitly states that the bank is not expecting a recession.

[00:24:17] We're not expecting a recession, he says, with those two things going in opposite directions.

[00:24:24] You're not going to see growth really accelerating because population growth is going to be pulling it down.

[00:24:30] Well, per capita growth is going to be pulling it up.

[00:24:35] We'll see exactly what the dynamics are, but our baseline will continue to be that the economy is growing.

[00:24:42] So who is right here, Dan?

[00:24:44] I would say they're both kind of right.

[00:24:47] Neither is like fully right.

[00:24:49] I think like, look, Polo's disqualified with the technical part.

[00:24:52] I think like we're in a very deep per capita recession, you know, the me session, as I called it, and was so gracefully poached, the term by, I don't know who, I can't even remember who it was now.

[00:25:05] But, you know, and Tiff talked about the per capita growth and how, you know, so I think Tiff acknowledged the actual type of recession that we're in and Polo's kind of disqualified with the technical part.

[00:25:16] So I think they're both sort of right.

[00:25:17] I think central bankers have learned how to be careful with their language.

[00:25:21] The interesting part is, you know, the question becomes like, are we going to see more rate cuts, right?

[00:25:27] And a recession would probably necessitate more rate cuts, you know, and Tiff mentions there was two responses here.

[00:25:34] He says, going forward, I expect the governing council will be considering further reductions in the policy rate.

[00:25:42] But he also said, we will be considering further reductions, but we'll be taking a more gradual approach.

[00:25:47] So you might not be seeing any more jumbo rate cuts.

[00:25:50] So I do think we will see contraction in Canada's economy next year personally.

[00:25:56] And my Twitter seems to agree.

[00:25:58] And I would say my Twitter following is certainly bearish.

[00:26:02] I think Twitter is just it's a bear's den.

[00:26:04] But I ran a poll.

[00:26:05] It says, who do you who do you feel is correct in their assessment?

[00:26:08] And it says in a recession Polos and 92.6 percent of people voted for that.

[00:26:14] And then it says no recession Macklem and 7.4 percent of people voted for that.

[00:26:19] So I think the consensus is clear among at least my Twitter audience that.

[00:26:24] I believe they call that a landslide.

[00:26:26] Yeah.

[00:26:26] So I should I should pull Instagram.

[00:26:28] They're a little bit more bullish.

[00:26:29] What's the happiest social media?

[00:26:31] Maybe we'll do, you know, contrasting polls.

[00:26:35] Go to the bears.

[00:26:36] Then I like that.

[00:26:37] And then maybe the bulls pen.

[00:26:42] Now, Dan, you've been running a few of these polls on Twitter and turning them into reports.

[00:26:47] I guess that's one of the benefits of having probably one of the largest real estate focused Twitter followings in the country.

[00:26:53] You recently did one regarding rate cuts as well.

[00:26:57] Can you talk to me a little bit about that?

[00:26:59] Yeah.

[00:26:59] So, I mean, I have a reasonably big following on social media.

[00:27:02] And I've really just been doing it to try and get insights into questions that I want to know the answer to and get an understanding for how people feel about stuff.

[00:27:10] And then I, you know, sort of thought, OK, well, maybe we can turn these into reports for the media to use to add some color to their article, like articles about rate cuts, for example.

[00:27:20] So, yeah.

[00:27:22] And this comes from a special report that you put out with Valerie, which is titled Strong Dollar versus Lower Interest Rates.

[00:27:30] What Canadians Really Value.

[00:27:32] Now, Valerie's latest survey where you ask Canadians to choose between those two economic priorities, right?

[00:27:39] A strong Canadian dollar or a lower interest rate.

[00:27:43] Now, even after the Bank of Canada's, I love how we're calling 50, a jumbo cut.

[00:27:48] But even after Canada's latest 50 basis point cut, reducing the overnight rate to now 3.25%, the results were decisive.

[00:27:57] 61% favored a strong dollar, while 39% preferred lower interest rates.

[00:28:04] These preferences highlight Canadians' concerns about overall economic stability, purchasing power.

[00:28:11] It's a very important one.

[00:28:13] And another one, long-term economic prosperity.

[00:28:17] And the special report explores why Canadians may be prioritizing stronger currency, what it says about their economic realities,

[00:28:26] and how this choice impacts key areas such as inflation, trade, and, of course, real estate.

[00:28:32] Yeah.

[00:28:33] So, it goes on to talk about why Canadians fear a weak dollar.

[00:28:36] And the primary reason is the imported inflation effect, right?

[00:28:39] So, one of the most immediate consequences of a weak currency is imported inflation.

[00:28:47] We've talked about this a couple of times on the show.

[00:28:48] Imported inflation occurs when the cost of goods and services purchased from abroad rises due to a devalued domestic currency.

[00:28:55] For a country like Canada, where imports play a significant role in daily life, this can have far-reaching effects.

[00:29:00] Everything from energy to groceries to electronics becomes more expensive,

[00:29:04] creating a ripple effect that impacts every household.

[00:29:07] Consider Canada's reliance on international markets for essential goods.

[00:29:10] For example, Canada imports over $9 billion worth of fresh fruits and vegetables annually, according to latest statistics.

[00:29:16] Wow.

[00:29:17] Yeah.

[00:29:17] So, a weaker dollar would increase these costs, making healthy eating less affordable.

[00:29:21] Don't worry.

[00:29:22] You can now pay no HST on junk food.

[00:29:25] So, eating crap food is fine.

[00:29:28] But eating healthy will be less affordable for Canadian families.

[00:29:31] Similarly, the cost of fuel, a commodity largely tied to global prices, would rise, further straining household budgets.

[00:29:39] So, when the Canadian dollar is weak, it affects us in several different ways.

[00:29:43] First, it makes everything more expensive, right?

[00:29:47] When shopping internationally or traveling abroad, I'm personally headed to New York next week.

[00:29:51] I am not looking forward.

[00:29:53] Literally, I am not looking forward to spending, you know, way more than I should because of our dollar, right?

[00:30:01] You simply get less for your money.

[00:30:04] And this is especially noticeable for Canadians and as real estate investors who are considering buying properties in the United States.

[00:30:12] But maybe the play is actually the opposite.

[00:30:15] What if we should actually be focusing on getting Americans to invest in Canadian real estate, right?

[00:30:22] The weak dollar also creates problems for Canadian businesses.

[00:30:26] Well, it makes our exports cheaper for other countries to buy.

[00:30:30] This benefit is offset by those higher costs.

[00:30:33] This happens because businesses have to pay more for materials and goods that they need to import from other countries.

[00:30:40] And finally, a weak dollar makes Canada less appealing to skilled workers from other countries, right?

[00:30:47] We've heard about that brain drain.

[00:30:50] Well, a weak currency contributes to that.

[00:30:52] These workers often look at how much their salaries could be worth globally.

[00:30:57] And they may choose to work in other countries with stronger currencies and more affordability.

[00:31:01] And this could make it harder for Canada to attract and even retain the talent it needs to grow the economy.

[00:31:08] So, what interest rate outcome do you think would have a greater impact?

[00:31:14] Increased export demand or imported inflation?

[00:31:18] Now, again, another landslide.

[00:31:19] Dan, do you want to read out those statistics that you pulled?

[00:31:22] Yeah.

[00:31:23] So, 81.4% of people felt that imported inflation would be the more powerful rate outcome based on a falling Canadian dollar.

[00:31:34] And, you know, like there isn't necessarily a one-to-one correlation.

[00:31:38] And actually, DeerPoint Macro, who's like a buddy of both of ours, comes to the meetups and has posted.

[00:31:44] Sharp guy.

[00:31:44] Yeah, Sharp guy definitely posted a lot about this on Twitter.

[00:31:47] That there isn't really like a super good correlation between Canadian interest rates and the Canadian dollar.

[00:31:54] But I feel like I said to him, I said, I need to see that data set because I imagine that that correlation probably broke during the GFC when Canada had a really low rate, but also a really high dollar because the USD was getting just crushed by the GFC, right?

[00:32:07] So, the easiest way to really like understand this whole thing, you know, understanding that we're thinking and speaking to an audience of real estate investors, we look at return metrics, right?

[00:32:17] ROI.

[00:32:18] And you can think about interest rates as the ROI on your currency.

[00:32:22] I love that.

[00:32:23] Yeah, if you buy Canadian dollars, the rates that you would earn on that is the interest rate in Canada's economy.

[00:32:29] So, interest rates directly affect currency value.

[00:32:32] This is like where Forex, the whole Forex thing, like there's actually a really cool phenomenon like of that if you really want to understand like the whole Forex thing from the beginning.

[00:32:40] It was like a bunch of Japanese ladies who were, you know, basically staying at home and trying to find a way to earn more money for their family.

[00:32:48] And they started borrowing really cheap money in Japan because Japan's economy has been like crushed for like 30 years, right?

[00:32:54] So, they had the cheapest interest rate in the world.

[00:32:56] And they would go and buy, you know, Canadian dollars or US dollars where they could get a greater return.

[00:33:02] And this Forex trade, that's kind of like the origination of this cool.

[00:33:06] That's awesome.

[00:33:07] Shout out to the Japanese ladies, dude.

[00:33:08] Yeah, yeah.

[00:33:09] Cool, cool story.

[00:33:10] Yeah.

[00:33:10] But anyway, so, interest rates directly affect currency value.

[00:33:15] From my perspective, at least, to your point, I would disagree with you.

[00:33:17] Higher rates attract foreign investment and strengthen the Canadian dollar while lower rates reduce returns and weaken it.

[00:33:23] The Bank of Canada has to balance economic growth with currency strength.

[00:33:26] We're not the USD.

[00:33:27] We don't have to have a super strong, you know, we don't have a global reserve currency status to protect.

[00:33:33] But lower rates create both opportunities and challenges.

[00:33:36] Yeah, exactly.

[00:33:36] And while lower interest rates make things like mortgages and loans more affordable, especially for first-time homebuyers, they can weaken the Canadian dollar.

[00:33:46] And this leads to higher costs for imported goods and increased inflation overall.

[00:33:50] So, like a seesaw, when interest rates fell, the dollar often weakens.

[00:33:56] And now, many Canadians recognize this trade-off, preferring a stronger currency for its broader economic benefits rather than lower rates.

[00:34:07] Yeah.

[00:34:07] So, another thing that you'd kind of want to think about then is the dollar's impact on Canadian real estate and foreign investment.

[00:34:13] A weaker Canadian dollar affects real estate potentially by attracting foreign investors, right?

[00:34:17] They can buy at a discount.

[00:34:19] Despite the foreign buyer ban until 2027, investors can still buy properties out of major cities, commercial properties and buildings with over four units.

[00:34:26] We'll get to that announcement on the government website.

[00:34:31] But the weak dollar makes these investments more affordable for those with stronger currencies.

[00:34:35] When the dollar weakens, Canadian properties become cheaper for foreign buyers.

[00:34:39] For instance, $5 million Canadian commercial property costs less than USD, creating investment opportunities while reducing domestic affordability.

[00:34:46] And we know that there's a lot of disenfranchised folks in the U.S. right now.

[00:34:51] We saw a record number of Google searches of how to move to Canada.

[00:34:55] So, I would imagine even if those individuals don't move to Canada, it would be plausible to imagine that some of their capital might move to Canada.

[00:35:01] This foreign investment influx can drive prices up in multi-unit and commercial properties.

[00:35:06] As developers shift focus to these more profitable projects, it reduces supply of single-family homes and smaller rental units.

[00:35:13] This trend is already visible in the rise of purposeful rental starts versus single-family homes in Canada, right?

[00:35:19] Where we're basically seeing almost no single-family homes being built relative to what it was before, but tons of purpose-built rental construction.

[00:35:27] And this would lead to higher prices that can challenge domestic buyers and renters potentially.

[00:35:31] Okay.

[00:35:32] So, we're talking about domestic buyers and renters, but what about the foreign buyer ban, Dan?

[00:35:37] So, there's now a two-year extension on the ban of foreign ownership of Canadian housing?

[00:35:43] Yeah.

[00:35:43] So, the government did announce that they would extend it until the end of 2027.

[00:35:46] But again, as I mentioned in my last statement, properties located outside of census metropolitan areas or CMAs and census agglomerations or CAs are exempt from the ban.

[00:35:56] So, rural properties basically.

[00:35:58] Buildings containing more than four residential dwellings are exempt.

[00:36:02] So, anything bigger than a fourplex.

[00:36:05] And commercial real estate properties remain exempt from the ban.

[00:36:08] These exemptions-

[00:36:09] Okay. So, still a couple options.

[00:36:10] Yeah.

[00:36:10] Yeah. Yeah. But I mean, you know, you kind of have opportunities still for foreign investors to play in smaller and rural communities outside of major urban centers.

[00:36:21] You can, you know, get into multi-unit residential buildings and mixed use and commercial developments.

[00:36:26] So, the ban restricts foreign buyer.

[00:36:28] Like, they basically just don't want foreign buyers competing with the regular Joe family trying to buy a house to live in.

[00:36:35] Right?

[00:36:35] Yeah.

[00:36:36] That makes sense.

[00:36:37] So, this whole discussion from my perspective around the Canadian dollar and the strength of the U.S. dollar and the strength of the U.S. economy really reminds me of the 1990s.

[00:36:45] The 1990s setup we've talked a lot about where the U.S. had a mild recession but Canada got absolutely crushed.

[00:36:50] Right. And now we're seeing a similar divergence, right?

[00:36:54] U.S. jobless claims are up but their PPI is rising showing economic strength and inflationary pressures at the same time.

[00:37:02] Yeah, exactly. And so, if the U.S. stays strong while Canada weakens, our dollar could suffer even more.

[00:37:07] And historically, this has happened before.

[00:37:09] Now, speaking of historical parallels, what about the Volcker era? That's another interesting comparison.

[00:37:16] Yeah. So, Volcker era was particularly relevant here where you are seeing a little bit of a resurrection and inflation in the U.S.

[00:37:23] We saw basically what economic historians would call a double-dip inflation curve.

[00:37:29] So, when they thought they had inflation beat and they eased up, it came roaring back.

[00:37:34] And that's where we ended up with those 18% interest rates.

[00:37:38] Yeah, exactly. That forced them to get even more aggressive that second time around with hikes.

[00:37:43] And as you said, Dan, you know, double-digit stuff that would really just destroy a lot of people right now.

[00:37:49] Yeah. The key difference now is we're cutting rates while the U.S. is still showing economic strength, at least on some metrics.

[00:37:54] Now, I think that there are enough metrics showing that the U.S. economy is slowing.

[00:37:58] I think the U.S. election proves that their populace feels that the economy is slowing.

[00:38:02] It's feeling the pressure of the economy.

[00:38:03] But if history repeats and maybe they are in a recession but it's not as bad as ours, we could see significant pressure on the Canadian dollar and end up like the 90s.

[00:38:13] Yeah. But unlike the 90s, we're much more leveraged now, especially in housing.

[00:38:20] And that does add a little bit of danger to this mix.

[00:38:23] A weak dollar combined with high debt levels could be particularly challenging to fix.

[00:38:29] Yeah. So maybe the lower Canadian dollar will boost the housing market.

[00:38:35] But if it doesn't, will the latest Bank of Canada rate cut boost the housing market?

[00:38:42] And this is probably the question that people came to listen to this episode for.

[00:38:46] But we got to wait until, you know, three-quarters of the way through to start dropping the answers, I guess.

[00:38:51] So analysts weighed in from the financial posts, which puts out a lot of great data.

[00:38:56] So the move, that is the Bank of Canada's move, is expected to provide significant relief to the real estate sector.

[00:39:02] Of course, easing costs and hopefully stimulated demand.

[00:39:05] Now, the economic context is that while inflation is under control at around the 2% mark, concerns remain about rising unemployment.

[00:39:14] And of course, these potential impacts from U.S. trade policies.

[00:39:18] Now, analysts do anticipate that the Bank of Canada rate will settle around 2.5%, which should encourage increased real estate market activity.

[00:39:28] This is lower than the bank's own economists who had originally thought that the rate would land and settle around 3%.

[00:39:35] So, again, 50 basis points off of where the bank's own economists thought.

[00:39:40] Now, that rate cut is expected to drive market demand and potentially lead to an early start to the spring housing market.

[00:39:48] Wow, I love how we're not even at Christmas yet and we're talking about, hey, we're going to have a rip in spring.

[00:39:52] So us.

[00:39:53] So we've seen some mortgage rule changes, right?

[00:39:57] New lending policies that will come into effect December 15th.

[00:40:00] So when you listen to the show, they will already be in effect.

[00:40:04] And that will expand borrowing power, particularly benefiting first-time homebuyers.

[00:40:09] And it'll also change up competition, right?

[00:40:12] Lower rates combined with stronger sales could intensify competition and potentially price out some of those buyers,

[00:40:19] particularly in major urban centers like the Vancouver's and Toronto's of the world.

[00:40:25] Yeah, I would agree with most of those things other than I think the strength of the spring market is really going to depend on how bad things get in unemployment.

[00:40:34] But I feel like that's kind of a slow-moving train.

[00:40:36] So, I mean, it might have a strong spring market and a really bad economy after that.

[00:40:41] So the next one here is from Global News and it says,

[00:40:45] Stubborn fixed mortgage rates might not fall despite the Bank of Canada cut.

[00:40:50] And it says,

[00:40:51] While we're seeing signals about potential rate cuts from the Bank of Canada,

[00:40:54] it's important to note that fixed mortgage rates haven't seen significant decreases yet.

[00:40:58] This is because fixed rates are primarily influenced by bond yields,

[00:41:02] which have remained relatively stable,

[00:41:04] although they did drop pretty substantially at the open today, Friday, December 13th, below the 3% mark.

[00:41:10] I'll take a look at them again in a second when you're babbling on.

[00:41:14] But the five-year Government Canada bond yield, which typically determines fixed mortgage rates,

[00:41:19] hasn't experienced the same dramatic shifts we're seeing in Bank of Canada policy discussions.

[00:41:23] It was actually interesting when the Bank of Canada cut,

[00:41:26] the Government bond yield actually jumped up really high and then it crashed right after.

[00:41:30] Like CAD is really starting to look like a bit of a meme coin at this point.

[00:41:36] Oh no, take that back.

[00:41:38] Yeah, so this disconnect between variable and fixed rates highlights the complex relationship

[00:41:45] between monetary policy, bond markets, and mortgage pricing.

[00:41:47] And the idea that maybe basically the bond market is saying that they don't think the battle against inflation

[00:41:53] is necessarily over yet.

[00:41:55] Yeah, I'd agree with that.

[00:41:56] I think it will rear its ugly head again.

[00:41:59] Now, let's talk about mortgages for a second.

[00:42:01] So fixed rates may have already hit their lowest point despite the rate cut as they're influenced by bond yields

[00:42:07] rather than the policy rate, which you just explained, Dan.

[00:42:11] Variable rate mortgages will see immediate benefits from the rate cut, right?

[00:42:16] While fixed remain relatively unchanged.

[00:42:18] Fixed rates are expected to stay in that kind of low to mid 4% rate

[00:42:23] with potential drops to the high threes, maybe in the latter half of 2025.

[00:42:31] But there's uncertainty around the potential U.S. tariffs, right?

[00:42:34] That's causing a lot of people some stress and it's causing lenders to even be more cautious

[00:42:39] than they already are about adjusting fixed mortgage rates

[00:42:42] and narrowing the spread between fixed and variable rates

[00:42:46] is making it harder for borrowers to choose between those two options.

[00:42:50] I know that I've had a lot of lengthy conversations explaining the differences to some of my clients

[00:42:57] in the past couple of days and I'm sure I will moving forward.

[00:43:01] Yeah, so I guess we'll wrap it up there.

[00:43:03] To sum it all up, the Bank of Canada's recent rate cuts and their impact on the Canadian economy

[00:43:07] are a pretty complex thing to try and understand.

[00:43:11] So there's a couple of important implications.

[00:43:13] Number one is currency impact, which we discussed at the beginning of the episode.

[00:43:16] At least while the U.S. is strong because of their employment is falling, right?

[00:43:22] Jobless claims are going up and their PPI is also rising.

[00:43:25] But lower rates are weakening the Canadian dollar, leading to concerns about imported inflation.

[00:43:30] Higher import costs affect everything from groceries to construction materials.

[00:43:34] There's also real estate market effects.

[00:43:35] Despite the foreign buyer ban, exemptions still allow strategic foreign investment

[00:43:39] in commercial and multi-unit properties as well as rural properties.

[00:43:42] Fixed mortgage rates remain stubborn due to bond yields while variable rates benefit from the cuts.

[00:43:48] And this hasn't really materialized in much increase from a price perspective,

[00:43:53] but it has ramped up the number of transactions in the market.

[00:43:56] Market dynamics.

[00:43:58] Spring market could see increased activity due to lower rates and expanded borrowing power

[00:44:03] as well as new policies, which the Bank of Canada Governor, Deputy Governor Carolyn Rogers,

[00:44:08] has warned against tinkering with the market and new mortgage rules effective.

[00:44:13] Those new mortgage rules effective December 15th will particularly benefit first-time buyers

[00:44:18] in your kind of Toronto and Vancouver markets.

[00:44:21] I think that's all I have from a summary perspective.

[00:44:24] Anything you want to leave our listeners with?

[00:44:26] Yeah, I mean, lots of great takeaways from this episode.

[00:44:30] The only thing I'll add is we just had our holiday party, Dan.

[00:44:35] We have seen something that you and I started about a year ago,

[00:44:38] which was really putting some focus on these events and these meetups across the country.

[00:44:42] And it's just been such an amazing ride and something I'm very, very proud of you and myself

[00:44:48] and Jonathan, our partner in that side of the business.

[00:44:51] Guys, go join a meetup.

[00:44:54] Get yourself out of your comfort zone.

[00:44:55] Go have these kind of conversations, right?

[00:44:57] What do you think interest rates are going to do for you in your markets across the country?

[00:45:02] There's a link in the show notes.

[00:45:04] Find a meetup close to you and go and attend it.

[00:45:06] And if you're feeling extra friendly because it is the season of gratitude and giving,

[00:45:11] go leave us a five-star rating.

[00:45:13] And if you're feeling extra generous, leave us a review.

[00:45:16] Love you so much.

[00:45:17] Happy holidays.

[00:45:18] We'll say that a couple more times as we have several more episodes coming out.

[00:45:22] We'll see you soon.

[00:45:23] The content of this podcast is for educational and informational purposes only.

[00:45:27] It is not intended as financial, legal, or investment advice.

[00:45:30] Always consult a qualified professional for advice tailored to your unique circumstances.

[00:45:35] The views expressed are those of the hosts and guests and do not necessarily reflect the opinions of affiliated organizations.

[00:45:42] Daniel Foch is a real estate broker licensed with Valerie Real Estate Inc.

[00:45:47] Website is Valerie.ca, V-A-L-E-R-Y.ca.

[00:45:51] And a member of the Canadian Real Estate Association, the Ontario Real Estate Association, and the Toronto Real Estate Board.

[00:45:59] Nick Hill is a mortgage agent and partner at OWL.

[00:46:03] Mortgage license number 10317.

[00:46:06] Agent license M21004037.

[00:46:11] Agent license M220037.