Will Rate Cuts Make House Prices Go Up?

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

[00:00:14] Breaking news, Dan. The Bank of Canada keeps cutting rates 50 basis points this morning, Wednesday, October 23rd. We are now sitting at an overnight rate of 3.75.

[00:00:28] The Bank of Canada's overnight rate is the interest rate at which major financial institutions borrow and lend one day or overnight funds among themselves.

[00:00:41] So it's a pretty important rate. Now this rate serves as a key benchmark that influences other interest rates throughout the economy, including things like mortgage rates, savings accounts, loans, HELOCs, credit cards.

[00:00:55] Now when the Bank of Canada lowers this rate, it generally aims to stimulate the economy and economic growth by making borrowing cheaper, by making money cheaper.

[00:01:08] Conversely, when it raises the rate, it typically aims to cool down inflation by making borrowing more expensive.

[00:01:15] And we have experienced all of that and everything in between in the last few years here.

[00:01:22] Yet here we are, and house prices still aren't going up as I was told by all of the realtors in the GTA on TikTok and Instagram that the first 25 basis point hike was going to be my last chance to ever buy a house.

[00:01:36] Oh, come on. And if you, Dan, I feel like you and I probably live in a bit of an echo chamber here, but you might have been the first and quickest to post something on the interest rate.

[00:01:46] But man, I swear, I've got a lot of realtors and mortgage brokers on my Instagram and social media accounts and every single one of them has posted.

[00:01:54] But I also did notice-

[00:01:55] How would we possibly know without the real estate industry?

[00:02:01] Oh, I know. I know. But on your note, on your point, Dan, I noticed that realtors stopped saying that this would be the last chance to buy before prices maybe possibly start absolutely ripping again.

[00:02:13] That has to mean we're close to the bottom, right? Like once all of these real estate professionals capitulate and finally become bearish, I'm going to go and find a bull hat and put it on.

[00:02:23] We have that bull hat, but remember we had the bull and the bear hat, but the funny thing is the bear hat is such higher quality than the bull hat.

[00:02:31] The bull hat I think is like a baby costume, actually, to be honest with you.

[00:02:33] Yeah, I mean, the bull's horns like flop forward, which, you know, I guess may be an indication of the market.

[00:02:40] We need a better bull hat. It's kind of like that Kramer index, but instead like the reverse Kramer index, you just like inverse realtors, I guess.

[00:02:50] That would maybe be a decent strategy. I mean, to be fair, like the bulls were correct for a long time in Canada.

[00:02:57] Like the last bull run was one for the ages. But, you know, at a certain point, you have to know when to hang it up.

[00:03:04] And most of them have been too late to that party. So inverse realtors, maybe not a bad strategy. I don't know.

[00:03:10] I think there are a lot of good realtors out there. We got to give them credit too.

[00:03:12] And I think that these kind of moments in the industry really shine a light on that.

[00:03:18] It's like that swimming naked moment, right? Tide goes out. You see everything.

[00:03:22] Anyway, that's not what we're here to talk about. We're here to talk about the actual most important person in Canadian real estate,

[00:03:28] Tiff Macklem and the Bank of Canada. So let's hop into that.

[00:03:32] I got excited. I thought we were going to be talking about realtors swimming naked for a second.

[00:03:35] But yes, back to this is a family friendly show.

[00:03:39] Right. Of course. My apologies, everybody.

[00:03:41] So for the first time, it feels like the biggest thing for the Bank of Canada was the raid announcement.

[00:03:46] Now, Dan, I watched the presser and you read the monetary policy report.

[00:03:53] So we kind of divided and conquered this morning.

[00:03:55] And it was it was fun. It was a bit of a hectic, busy morning for us, though.

[00:03:58] Yeah. So for context, we're recording this on Wednesday, October 23rd, the day of the Bank of Canada announcement at 11.

[00:04:05] No, like minutes after, like minutes after it's done.

[00:04:08] So the presser just ended. But it's funny because I'm going through the monetary policy report trying to create an episode out of it.

[00:04:13] And I texted Nick. I'm like, oh, I'm so jealous. You get to watch the presser because we divided and conquered.

[00:04:18] Look. And he was look in there looking for some some soundbites.

[00:04:21] And I was like, I have to read this report. It's like I said this is the worst monetary policy report to date.

[00:04:27] Like the formatting was even different. Like they didn't I just felt like they didn't put a ton of effort into it.

[00:04:31] So anyway, I just I had said to you the the worst NPR today.

[00:04:36] Right. Yeah. And and I responded immediately. Yeah. The presser is super mediocre as well.

[00:04:40] Yeah. I guess it turns out that bear markets actually suck. So, I mean, it's not not fun.

[00:04:45] I guess, you know, sitting here being bearish like my my whole life, I feel like and all of a sudden it's my time to shine.

[00:04:50] And I'm actually like, oh, this is pretty depressing.

[00:04:54] Is that why you're wearing your bear Sterns hat?

[00:04:57] Yeah, might be. Is that? Yeah. OK, good, good, good.

[00:04:59] OK, so quickly, before we dive into the details of Bank of Canada's announcement, why aren't house prices going up because of the rate cuts?

[00:05:11] I think that is something that probably a lot of people are wondering and trying to figure out.

[00:05:15] Yeah. So probably the easiest way for me to summarize this is from a tweet by Ben Rabideau,

[00:05:21] which basically says a reminder that a lot of the Bank of Canada's rate cuts are already priced into fixed mortgage rates.

[00:05:32] The five year government of Canada bond yields were up this morning.

[00:05:35] And it shows a screenshot of five year government of Canada bond yields at three point oh one six percent.

[00:05:41] And remembering that your variable rates are based on the Bank of Canada's overnight rate.

[00:05:45] Your fixed rates are based on the government of Canada bond yields, plus typically a risk premium of like two percent.

[00:05:52] And so, again, the bond market is the is what the market thinks that the Bank of Canada is going to do.

[00:05:58] And it already forecasted that this was going to take place. Right.

[00:06:03] Yeah, exactly. I mean, this wasn't this wasn't like back in the days where we just kept on getting those hikes and everyone was was shocked at it.

[00:06:10] This was widely anticipated.

[00:06:12] I mean, even I think the chief economist at one of the big banks was was predicting 75.

[00:06:17] And some people are even calling out that this wasn't enough.

[00:06:19] So widely expected. Dan, I think you had a poll on Instagram.

[00:06:23] And I think I saw a couple other polls and everyone was voting that that it was going to be a 50 basis point cut

[00:06:28] because the market had essentially expected it and already priced it in.

[00:06:33] Now, most buyers with mortgages that are three to five fixed rate now.

[00:06:38] So the Bank of Canada can't really impact demand by making capital costs cheaper for those fixed rate borrowers.

[00:06:47] Yeah, exactly. You really rely on the market, the market that's pricing in government of Canada bond yields to reduce interest rates for for those buyers.

[00:07:00] And it's not doing that exceptionally efficiently.

[00:07:03] So the Bank of Canada can reduce rates for variable rate borrowers, but it doesn't really give more buying power to the market because right now variable rates are higher than fixed.

[00:07:11] So most people are buying or, you know, based on CMHC data, most people are buying with fixed short term fixed.

[00:07:20] So like three to five years, like you mentioned, rather than variables.

[00:07:24] And so even if the Bank of Canada cuts rates, it doesn't do anything to the buyers.

[00:07:28] Yeah, that's that's totally correct.

[00:07:29] And and to make that even more simple, they can impact supply by reducing rates for existing homeowners, by reducing rates for those holding variable mortgages and reducing rates for those that are facing that renewal cliff or that renewal wall in 2025 that we've all heard so much about.

[00:07:51] Yeah, we're going to get into that as well, because it's it is a huge portion.

[00:07:55] Like, I've always felt that they would be in a bit of a hurry to get rates down for that renewal wall.

[00:07:59] And it's not like it's not to say that they want to save homeowners, but it's if if they can get rates lower by 2025 and 2026, they can release a lot like a large portion of consumer or guest consumer spending or household income that would otherwise be spent on interest payments that will actually go to helping the recovery of the economy, which I think we're going to need in 25 and 26.

[00:08:23] So they're really more gaming the supply curve from my perspective by protecting existing households than the demand curve at this point.

[00:08:30] Regardless of that, they included usually I just honestly open up the monetary policy report and hit command F and go through and look for any mentions of housing.

[00:08:38] This was actually the fewest mentions of housing I've seen in a monetary policy report.

[00:08:43] But do you want to just they did they did put under a full heading they put in residential investment will pick back up.

[00:08:49] So do you want to just just read that start start reading those kind of key points to me?

[00:08:53] For sure.

[00:08:54] And and both Tiff and Caroline in the presser that I watched were asked that question directly.

[00:09:01] And you could almost tell that they they're probably so fatigued about asking or answering questions about about residential investments in the housing, because as they said multiple times with the presser, that that is the most interest rate sensitive part of the economy.

[00:09:16] It also makes up a huge part of the economy.

[00:09:18] So kind of caught in the crosshairs there.

[00:09:21] But yeah, so from the monetary policy report, residential investment will pick up and they had actually said this live.

[00:09:27] They expect residential investment to pick up as well as things like renovations on existing homes, whether that just be home improvements for, you know, your standard end user or things like putting basement suites in, etc.

[00:09:40] So growth in the residential investment sector is expected to rise about 6% in 2025 and 2026.

[00:09:48] Resales and renovations are anticipated to recover as interest rates decline.

[00:09:53] Resale and renovations should also be supported by a projected rise in house prices.

[00:09:59] And recent changes to government mortgage insurance rules are expected to bolster housing supply.

[00:10:05] And if you're wondering what we're talking about there, we have done several episodes recently on some some new federal policy surrounding mortgage rates and mortgage changes and organizations, etc.

[00:10:16] So go back and check those episodes out for some context.

[00:10:19] Yeah, I think that that's an important piece, actually, for this, because we're going to get to TD's analysis of the impact of that at the end of this episode, which will actually answer the question when are house prices going to go up?

[00:10:28] And the answer, actually, very simply, according to TD, not according to me, but according to TD, is that they'll go up sooner than they were going to go up before because of these new policies, which is kind of I mean, I guess that that does make sense.

[00:10:39] Like they increase the one and a half, the more the CMHC cutoff from a million to one and a half.

[00:10:44] So that moves the demand curve up, basically.

[00:10:46] Anyway, although the population growth should ease, according to the Bank of Canada, the level of demand is expected to remain robust and support new construction.

[00:10:55] I would agree with that.

[00:10:56] We're still going to see population growth, even though the population growth is going to be not as big as it was last year, which I think seems to be widely agreed upon, including the politicians who made that happen, that that that that wasn't maybe the right way to do things.

[00:11:07] Yeah.

[00:11:09] They also too late, I think.

[00:11:11] Yeah.

[00:11:11] They also go on to say that lower interest rates may also facilitate some increase in supply of housing by easing financing costs.

[00:11:18] And I will tell you, so I had an offer in last night on a multifamily for a client.

[00:11:24] And literally, they texted me this morning and said, that 50 basis point reduction means that I can pay $300,000 more for this property.

[00:11:32] So I would agree with that part.

[00:11:34] I think like, especially with multifamily financing, CMHC, MLI select, where you are so tied to this, this rate environment.

[00:11:45] They, they really like the Bank of Canada states here as a result, growth in housing demand is expected to outpace increases in supply.

[00:11:51] I think that that's true.

[00:11:53] I just think it takes a long time for that to like really materialize, especially because we have so many units closing.

[00:11:59] Like you still have that whole construction boom that started when rates were low, just kind of getting like just finishing right.

[00:12:06] That, that whole boom that started.

[00:12:07] So, so are you guys going to go back and, and increase the offer 300,000?

[00:12:11] We'll see.

[00:12:11] I don't know.

[00:12:12] I mean, it looks like it's going to become a pretty competitive property.

[00:12:15] Like honestly, a lot of these, a lot of these deals right now, like in the multifamily space, there's a lot of competition.

[00:12:20] You're seeing bidding wars, like, you know, cap rate, cap rates compression is still taking place and probably will continue if, if rates keep coming down.

[00:12:28] I mean, yeah, like it's, it's definitely a, it's a wild world to be a multifamily investor.

[00:12:34] Yes.

[00:12:34] Yes, it is.

[00:12:36] So unlike other sectors of the economy that are experiencing excess supply, the housing market is projected to remain tight.

[00:12:44] House prices are expected to rise, but the pace of those increases will likely be restrained because some home buyers will still be facing affordability challenges.

[00:12:54] And I think that's another important piece there as well, right?

[00:12:56] Yes, things are moving in the right direction.

[00:12:59] Inflation's at 1.6%.

[00:13:00] They're expecting inflation to, and this is, I mean, TIF really stuck, stuck to the script.

[00:13:05] This morning, Dan, as I was telling you, you know, I think he said, as I stated, or as I mentioned, or previously mentioned.

[00:13:11] Yeah, that's what he always does.

[00:13:12] That's funny.

[00:13:13] Multiple, multiple times.

[00:13:14] Yeah.

[00:13:14] I mean, and, and, and, and.

[00:13:16] I think he's learned, really learned to be careful with his words after.

[00:13:19] And to be fair, like I went back and listened to the thing about the, you know, interest rates will be low for the foreseeable future or whatever it was.

[00:13:25] It's like, realistically, like the foreseeable future is kind of only two years.

[00:13:28] If you think about it, like I can't see the past two years, really.

[00:13:32] You can see two years into the future.

[00:13:33] Like you can kind of like model it.

[00:13:35] Like, oh, if I do, if I do this, then, you know, these are like the chain of events that will happen for the next two years kind of thing.

[00:13:40] I don't know.

[00:13:41] Anyway, I try and give him like the benefit of the doubt.

[00:13:43] He has a really hard job, to be fair.

[00:13:45] Yeah.

[00:13:45] Not a job that I want.

[00:13:46] And just on that note, again, it was funny.

[00:13:48] He made mention of that because there was a lot of press questions in the presser who would have thought.

[00:13:54] And, you know, people were saying, hey, can we expect another one of these, you know, quote unquote jumbo hikes in December?

[00:14:01] And he just kept on reverting to, you know, we will analyze the data as it comes out.

[00:14:06] And one quote that I have here is, I'm not going to handicap the next move, which I found quite, quite interesting.

[00:14:12] Yeah, no.

[00:14:13] I mean, that is smart.

[00:14:14] Like they do have to be careful with their language because we go back to what the bond market is saying.

[00:14:17] Like that's what indicates how the bond market is.

[00:14:20] And so like if yields went up this morning, and that means the bond market actually bought that tone that TIF had towards, I mean, I guess that more dovish tone towards hiking or sorry, or towards cutting, like where he's saying, I don't know.

[00:14:34] I don't know if that's going to happen.

[00:14:35] Right.

[00:14:36] Whereas, you know, like if it's if it's writings on the wall.

[00:14:38] And to be honest, the answer to the question is like between this hike and the next hike, we have the U.S. elections and the Fed cut.

[00:14:46] And so realistically, like that's what he is talking about.

[00:14:50] Like, you know, you would have to be an idiot to be like, oh, yeah, I'm going to do exactly this in a month from now when we're in a completely different economy.

[00:14:58] And the largest democracy in the world is is who happens to be next door.

[00:15:02] Yeah.

[00:15:03] Yeah.

[00:15:03] And our largest trading partner, you know, so I don't know, like I get I get where he's coming from.

[00:15:09] Let's jump into the monetary policy report here.

[00:15:12] Starts with an overview.

[00:15:13] Basically, inflation dropped to about 2%.

[00:15:16] It's below 2 on regular CPI, but they use core typically.

[00:15:20] And so you'll hear core inflation.

[00:15:22] Core inflation is important to pay attention to if you're trying to get that telegraphing of what they're going to do.

[00:15:27] The decrease is due to lower energy prices and lower prices, lower pressure on prices overall.

[00:15:33] There's some big, big ones in shelter is still a huge component of inflation.

[00:15:38] I think we mentioned this in one of the last ones.

[00:15:40] Like it's still the last CPI we're talking about.

[00:15:43] Shelter is still like two thirds of inflation.

[00:15:45] So actually without shelter, like without rent growth and mortgage costs, you're like you're close to deflation.

[00:15:49] I think you're actually going to start hearing deflation being a more common theme than inflation.

[00:15:53] But anyway, when inflation is close to their target, prices for different goods and services are still changing at very different rates.

[00:15:59] Yeah.

[00:16:00] Now, over the forecast period, inflation is expected and obviously very hopeful.

[00:16:05] And they are going to do whatever they can to keep it at that 2%.

[00:16:09] Remember inflation, we want it at 2% to 3%.

[00:16:12] So, Dan, as you said, getting lower than 2% in some people's eyes might seem like a good thing.

[00:16:17] Hey, like, you know, we don't have any inflation, but that's actually not a good thing.

[00:16:20] And that's where we could see that the deflationary period, which I think we all as Canadians should really want to avoid.

[00:16:27] And the Bank of Canada and TIF have made it very clear that is exactly what they are trying to avoid.

[00:16:32] Now, as you said, Dan, core inflation, that should gradually decrease.

[00:16:37] The Bank of Canada sees both upside and downside risks to its inflation outlook and is equally concerned about inflation rising above or falling below that target.

[00:16:49] So, again, you know, they have the same data that – well, probably not the same.

[00:16:54] They've got a bit more.

[00:16:55] But, you know, this is, again, an emerging story.

[00:16:57] It's a moving target.

[00:16:58] It's not something that, you know, you have your crystal ball and you can predict this kind of stuff.

[00:17:02] As you said, two very major events that are going to have a role on this.

[00:17:08] So, Dan, talk to me about what's happening in the Canadian economy here.

[00:17:13] Yeah, I mean, it was mostly as expected.

[00:17:16] And I would say like – I thought they were going to say like, oh, we think there's going to be a recession.

[00:17:19] So, keep that in mind.

[00:17:21] Like they're always going to be kind of tame with the language for consumers because managing consumer expectations is high or is important.

[00:17:28] But they said basically Q2 growth slightly exceeded their expectations but Q3 looks weaker.

[00:17:33] GDP per person per capita is declining.

[00:17:36] We know this.

[00:17:36] We talk about this a lot on the show.

[00:17:37] So, I think that the way that you'll feel that most is that the biggest portion of what consumers, the per capita people, spend their income on is housing.

[00:17:47] So, 30% of household income typically goes towards housing.

[00:17:50] And so, that's going to mean lower spending on housing which means either, you know, probably more demand for smaller rentals realistically is my thought.

[00:17:58] The energy exports are increasing.

[00:18:00] That kind of supports that petrodollar status that Canada has.

[00:18:04] Like there's still demand for Canadian currency even in a weak economy because people have to use CAD to buy Canadian oil.

[00:18:11] Business and government spending growth is slowing.

[00:18:14] That's one of concern obviously.

[00:18:16] And honestly, business expectations were pretty bad.

[00:18:20] I'll see if I can pull some charts on it while you're chatting here.

[00:18:22] But yeah, I mean kind of talk to me a little bit about that excess supply especially how it relates to the labor market.

[00:18:27] I mean the economy in general continues to be in excess supply and the labor market has softened with increases in unemployment.

[00:18:36] And the worst part is that increase in unemployment or even honestly just difficulty to find jobs is really concentrated among newcomers to Canada and younger Canadians.

[00:18:50] Which is really tough because, you know, I think that has a really kind of trickle down or trickle up effect, right?

[00:18:56] If you're young, you can't find a job.

[00:18:57] You can't get into the housing market.

[00:18:59] You're likely not having kids.

[00:19:00] That affects the birth rate.

[00:19:02] You know, it kind of has a much larger and more detrimental effect than just, hey, you know, I can't find a job for a couple more months.

[00:19:10] It's a bigger issue than that.

[00:19:12] So my heart goes out to all the young people out there trying to find jobs and looking for gainful employment but can't do it.

[00:19:19] Wage growth remains elevated relative only to productivity though.

[00:19:25] Yeah.

[00:19:25] I mean the wage growth piece is interesting because that could kind of help.

[00:19:27] Like I think your rents grow along your wage growth line.

[00:19:31] But the labor market part is interesting when you talk about the – there's a chart, Chart 7, says the increase in the unemployment rate is concentrated among newcomers and youth.

[00:19:41] It sounds like, you know, like, oh, who cares?

[00:19:43] It's just newcomers and young people.

[00:19:44] Like that's what – like every time I've seen economics put out on it, it sounds like that's what people are saying.

[00:19:48] Oh, we don't have to worry about it because it's just them, right?

[00:19:50] But I would say you do have to worry about it more because it's just them because people who are supposed to be growing into the economy, young people,

[00:19:58] and then people who are supposed to be growing into the economy, new people to Canada.

[00:20:01] And if you cut off those two like vital lines of people entering the economy and starting to jump in, it could really make this a more long-term issue, right?

[00:20:12] Somebody who doesn't have a job in their 20s today now all of a sudden doesn't have savings in their 30s and you know what I mean?

[00:20:17] Exactly.

[00:20:18] And it really like – it takes that problem and makes it a lot of a longer-term problem.

[00:20:22] They do expect economic growth to pick up into about 2.5% over 25, 26.

[00:20:29] Consumer spending and business investment are expected to strengthen, supported by decreases in interest rates.

[00:20:35] So they kind of telegraph that – what they're – they obviously expect more decreases in there.

[00:20:41] Yeah, and that came up multiple times in the presser that they're not done, right?

[00:20:48] They're not done, the cutting cycle, right?

[00:20:50] I mean it's funny.

[00:20:51] You had posted that thing yesterday on Instagram expecting this rate cut at 50, again, widely expected.

[00:20:57] And I think I wrote, you know, they hiked too fast.

[00:21:01] Now they're cutting too fast.

[00:21:02] You know, what kind of roller coaster are they on?

[00:21:03] Stop playing with our hearts.

[00:21:04] And it got a ton of likes.

[00:21:05] I think that's just what the sentiment is right now.

[00:21:08] It's like, no, we can't keep up with this.

[00:21:10] And, you know, the forecast that they have here reflects the net effect of slower increases in population and rising growth and consumption on a per-person basis.

[00:21:21] Export demand is also projected to remain strong, which is a good thing.

[00:21:26] Now, Dan –

[00:21:26] It's a good thing as long as it's not telegraphing a weaker Canadian dollar, but anyway.

[00:21:30] Right, which it very well might be.

[00:21:32] Now, Dan, you wrote a piece here for Real Estate Magazine that we're going to jump into and cover some key points from.

[00:21:39] So let's hop over to that.

[00:21:40] Yeah.

[00:21:41] So basically the article in REM Real Estate Magazine says what to expect and how it affects your mortgage.

[00:21:48] So the Bank of Canada obviously cut 50 bips today, brought the rate down from 4.25 to 3.75%.

[00:21:56] Primary question is how does it impact mortgages, inflation, and the broader economy?

[00:21:59] I think we covered a bunch of that, but there's a couple of things that I want to talk about, especially regarding renewals and the wider financial landscape.

[00:22:06] So kick me off with why a lot of people want this to be – I think people have realized that rate cuts aren't actually good news anymore, but let's sort of discuss and kind of reiterate why that is.

[00:22:16] Yeah, for sure.

[00:22:17] I think this is a very, very important distinction, right?

[00:22:20] I mean, it is – let's be very clear.

[00:22:22] It is good for some people, right?

[00:22:24] There's a lot of people suffering out there.

[00:22:26] Housing costs, debt costs are through the roof for a lot of people.

[00:22:30] So we don't want to see our fellow Canadians suffering or going bankrupt, and I know there's a ton of people in really rough shape right now.

[00:22:39] But again, on the bigger picture, you're right.

[00:22:42] It is not a good thing.

[00:22:44] It almost seems like this was a bit of an emergency cut, right?

[00:22:48] This is probably being looked at by other central banks around the world as, yikes, what's happening in Canada that they've cut multiple times is the fourth cut, I believe, in a row and the biggest one of them yet.

[00:23:00] So, you know, at a first glance, the Bank of Canada's 50 basis point rate cut might seem like a positive news for borrowers and even Canadians in general.

[00:23:10] But lower interest rates generally translate to cheaper borrowing costs, which could help prospective homeowners and businesses alike.

[00:23:19] However, such a rate cut may not be the sign of economic health.

[00:23:24] Now, often when central banks cut rates significantly, 50 basis points being coined as a jumbo cut, so I would say it's significant, it's because they anticipate economic challenges ahead.

[00:23:36] And in this case, the rate cut could signal concerns about a looming slowdown or an increased slowdown because we're already slow.

[00:23:44] And even, dare I say, a potential recession in Canada.

[00:23:48] And we're going to be careful with that word, Dan, because we've been talking about it for a long time.

[00:23:52] And is this the closest that we are getting to a recession?

[00:23:57] I mean, I don't know if it feels like it.

[00:23:59] It's tough because, like, you know, I mean, we did coin the term me session here, which did its rounds in the, which became mainstream.

[00:24:06] That actually became a mainstream term, which is pretty funny.

[00:24:08] Yeah, it's kind of cool.

[00:24:10] Yeah.

[00:24:10] Yeah.

[00:24:11] Total hipsters over here saying we started it.

[00:24:13] But look, we've managed to stave off a recession so far in Canada from government hiring, having a positive impact on unemployment, obviously, creating jobs and population growth, which has a positive impact on consumption.

[00:24:27] You have more people here consuming the limited resources.

[00:24:30] And so that can grow the economy.

[00:24:32] But as we're learning, there's a limit to how long you can do that.

[00:24:35] It can't go on forever.

[00:24:36] People start getting pissed off.

[00:24:38] It starts to lead to civil unrest.

[00:24:40] It starts to lead to huge declines in GDP per capita.

[00:24:44] And GDP per capita is horrible, by the way.

[00:24:46] We're like, we're almost at the point where we have a lost decade of GDP per capita.

[00:24:49] So by 2025, we will likely be at 2015 levels of GDP per capita.

[00:24:54] So we've experienced basically no growth on a per person basis in the 10-year period.

[00:24:58] And again, the Bank of Canada Monetary Policy Report expects that to recover.

[00:25:02] But the next piece is that that per capita spending is, as I'm going to quote RBC here, it says, real per capita retail spending is nothing short of abysmal on RBC's website.

[00:25:14] And their words, not mine.

[00:25:16] But I noticed it was still higher than pre-COVID, so it can't be that bad.

[00:25:20] But anyway, I think that there are a lot of factors that are leading me to believe that maybe we can keep the GDP growing from government spending because we're going to have to spend a lot to get out of a recession and keep the construction industry active.

[00:25:39] But if we do, it's going to come at the cost of GDP per capita or that me session, that individual recession that everybody is feeling, even though it's not showing up on paper as a national decline in GDP.

[00:25:52] That me session will get worse.

[00:25:53] So you either sacrifice everybody on an individual household basis to save that one GDP growth number, or you let the GDP collapse and let a recession take place so that we can all rebuild it.

[00:26:09] And that process of rebuilding is really the recovery is like I think what everybody is waiting for, but we can't have that if we don't actually see a decline.

[00:26:17] Yeah.

[00:26:18] Yeah.

[00:26:18] Yeah.

[00:26:18] I want to just again pull a quick quote I jotted down here from the presser because one of the questions was, okay, yeah, the numbers are now going in the right direction, right?

[00:26:26] Inflation's down.

[00:26:27] Interest rates are down and will continue to go down.

[00:26:31] But the numbers are saying one thing, but are Canadians doing better?

[00:26:35] Are we feeling it?

[00:26:37] And, you know, TIF's response was kind of like, yeah, we're very aware of it.

[00:26:41] You know, with inflation and interest rates coming down, they don't have to worry about major changes in the cost of living anymore.

[00:26:47] It's been a long road back.

[00:26:48] It's been tough.

[00:26:49] And we know that high interest rates and inflation for the last few years have been painful.

[00:26:53] But now we are back to low levels of inflation and interest rates are down.

[00:26:57] It's been a long fight against inflation, but it's worked and we are coming out the other side and Canadians should be able to breathe a sigh of relief.

[00:27:06] Overall, it's a good news story.

[00:27:09] So, you know, I think, again, tough job.

[00:27:13] They are very aware at this point.

[00:27:15] How could you not be aware of kind of consumer sentiment as to what's happening?

[00:27:19] But again, you know, that lost decade, the numbers, you know, it's all of it.

[00:27:24] Damn, we've posted charts on this that have been shared, I think, hundreds of thousands of times at this point.

[00:27:29] And the lost decade is just a scary thing.

[00:27:31] It's a scary thing to say even, right?

[00:27:32] So, you know, though the lower rate will reduce the cost of borrowing, it also just at the Bank of Canada is attempting to stimulate a kind of floundering economy.

[00:27:45] While homeowners may see some relief in their monthly payments, this could be overshadowed by things like rising unemployment or in just overall weaker economic activity.

[00:27:54] If a, let's say, more real downturn starts to materialize.

[00:28:00] Yeah.

[00:28:00] So there's a part of the monetary policy report.

[00:28:04] It's a cool chart.

[00:28:05] It says inflation in many CPI components is running below historical averages.

[00:28:09] But the part that really stands out to me is like, if you look at shelter services, I'm going to zoom in on it here for those, the three people who watch us on YouTube.

[00:28:17] But the shelter services is two thirds of, I think it's two thirds of inflation.

[00:28:25] And if you look at house price related services, so that's realtors, basically.

[00:28:28] It's been ice cold for since basically halfway through 2022.

[00:28:33] Rent is blood red, like, you know, like the red being the high and mortgage interest costs are blood red and mortgage interest costs.

[00:28:40] Rents will probably subside.

[00:28:41] And I think that their data lags quite a bit on rents because we know, you know, we just reported rentals.ca has rents being down.

[00:28:48] The mortgage interest costs isn't going to go away because everyone next year, even if rates come down, everyone next year is still going to be renewing at a higher rate than they were at before.

[00:28:56] And so that inflation will perpetuate, right?

[00:28:59] It's not just mortgage interest rate or mortgage interest costs for the market.

[00:29:03] It's mortgage interest costs for the individual consumer.

[00:29:06] That's how CPI works.

[00:29:06] It's a basket of goods for the individual consumer.

[00:29:08] And so you mortgage interest is going to have upward pressure on inflation for the next couple of years.

[00:29:14] 20 because you have 20 unless rates come down meaningfully, which I don't think like I think if they come down into the threes or, you know, yeah, threes, let's say you still have most people renewing at a higher rate.

[00:29:25] And so inflation is always going to look a little bit high and they'll always be fighting that a little bit.

[00:29:30] A large proportion of the battle goes on.

[00:29:32] Yeah.

[00:29:33] Well, the challenge is that they're fighting inflation with inflation, right?

[00:29:35] Like we're one of only two countries on earth.

[00:29:38] I think that like fighting fire with fire.

[00:29:40] Yeah, exactly.

[00:29:41] Exactly.

[00:29:42] I think we're, I don't know.

[00:29:43] Ben Tal was saying it.

[00:29:44] He, he said, um, I think one of only two, I think it's us in New Zealand are the only two places where mortgage interest is part of, uh, our CPI basket.

[00:29:51] And again, 60% of mortgages are set to renew in 25 and 26.

[00:29:55] So with today's, um, overnight rate at 3.75 now homeowners renewing their mortgages will, will face significantly higher payments than, than they will.

[00:30:04] They were used to before.

[00:30:06] Yeah, for sure.

[00:30:07] And, and this overall situation has an indirect implication for inflation.

[00:30:13] Higher monthly mortgage payments could reduce disposable income for other goods and services, right?

[00:30:18] Potentially having a negative effect, slowing consumer spending and easing some of that inflationary pressure.

[00:30:25] However, the base effect comes into play here as the shift from historically low interest rates to the current elevated levels still poses a financial strain for many households, right?

[00:30:36] We had low interest rates for, uh, almost zero interest rates for a decade plus, then extremely fast hiking cycle.

[00:30:42] Now we're in a cutting cycle, but we're still kind of higher than they were for years.

[00:30:47] So even with the recent rate cut recent being, you know, an hour and a half ago, uh, the elevated rates for renewed mortgages will continue to contribute to inflationary pressure in Canadian, in the Canadian economy overall, particularly through rising housing costs.

[00:31:06] Yeah.

[00:31:07] Then I guess the next piece would be the importance of the U S fed decisions.

[00:31:13] Obviously we mentioned this, like when TIF, they, they have the U S election and then the U S federal reserve.

[00:31:19] If you kind of have to hedge against not weakening the Canadian dollar too much.

[00:31:21] So they don't want to get too far ahead of the, the, um, U S fed because a weaker CAD, a weaker Canadian dollar would make imports from the U S more expensive, which could fuel a resurrection of inflation in Canada.

[00:31:31] And to avoid this, they are obviously carefully monitoring the feds moves.

[00:31:35] And I think that that's what TIF means when he was saying, I can't really tell you what's going to happen in December.

[00:31:39] He's trying to, he's basically trying to say it really depends if the fed cuts or not.

[00:31:43] Cause if they don't, then I'm gonna have to back off a little bit.

[00:31:46] Yeah.

[00:31:46] And I guess who, who wins the election is gonna maybe have a little effect on some stuff.

[00:31:51] Maybe.

[00:31:51] I don't know.

[00:31:51] I mean, it's supposed to not, but I guess it was like, I don't know.

[00:31:54] I mean, a lot of people think that, uh, you know, the, the, the central banks have been compromised and politicized.

[00:31:59] I don't know.

[00:32:00] I guess I still have faith in the central banking system.

[00:32:02] I have to, to be honest.

[00:32:05] Anyway, tell me a little bit about like what a recession could do to curb inflation.

[00:32:09] And then also, um, I guess we'll, maybe we'll jump to that TD thing, uh, after that too, just in the interest of time here.

[00:32:17] For sure.

[00:32:18] So, I mean, if we have a mild recession, it could potentially help reduce inflation to more manageable levels.

[00:32:24] Economic slowdowns often decrease demand for goods and services that eases pricing pressures.

[00:32:31] And now economists, many major economists, but Ben Tao, friend of the show and Dan, uh, you've shared stages with this very intelligent individual.

[00:32:38] He has suggested that a recessions, that recessions are a natural part of an economic cycle and can help control inflation.

[00:32:46] I can, could not agree more, right?

[00:32:48] If we look at shortwave and long wave economic cycles, you know, they really go in, in short tight loops and then long loops.

[00:32:55] And, and they always end up in a recession before they come back out of it.

[00:32:58] Now, the bank of Canada might consider allowing a controlled recession to bring inflation closer to its target.

[00:33:04] While causing a short-term economic challenge, this approach could be seen as a necessary thing for a long-term economic stability and balance.

[00:33:14] So, suffer now to be better in the long run, rather than kicking that proverbial can down the road again and again and again, which seemed to be the play for, for decades at, at this point.

[00:33:26] Yeah. And I think, um, Ben Tao, one of his favorite things to say is like, if the bank of Canada is given a choice between recession and inflation, they'll choose recession every time.

[00:33:35] And so, I think we're getting to the point where, again, they've, they've, I think they've already overshot and they're getting into the recession piece.

[00:33:40] And now they're just trying to soften that landing.

[00:33:43] Let's call it cushion the blow, maybe try and throw some mattresses out before the plane lands in order to.

[00:33:49] Tiff was talking about sticking the land this morning.

[00:33:50] I think that came up like two or three times, man. He literally said, stick the landing. I was like, nice.

[00:33:55] He must've been hearing our snakes on a plane episode.

[00:33:59] Yeah. I think it's tough to, to do. It really is. Like, I feel like they've overshot and it, but it's, but the, and they've said this earlier on, you could tell they're getting frustrated with all of the federal, uh, or the fiscal side, right.

[00:34:11] The government spending where it's like, it's really hard to keep inflation low when the government's just pouring money into all of this stuff. Right.

[00:34:19] Yeah. I mean, there's that old, you know, the old separation of church and state, but should we have separation of bank and state? I feel like they should be working a little more in conjunction, but.

[00:34:29] I feel like, um, it is funny. I think Jerome Powell, I think it was Jerome Powell who said it the best to Janet Yellen. Like she was talking about the inflation and stuff and, and how he's, um, like creating basically money supply through, um, print, like money printing, basically QE.

[00:34:45] And he just turned to them and said, I have to remind you, I'm not the one spending the money, which I just thought was brilliant. Like just brilliant. And I think that you can tell, you can tell kind of Tiff feels the same way a little bit about the current admin. Cause it is hard for them to stick the landing when like, again, these, you know, they can go in and write billion dollar stimulus policies and spend all this money.

[00:35:09] And it can become inflationary very quickly. Yeah. Or similarly, they can, you know, slash the population growth targets and it can become deflationary very quickly based on, and, and, and, you know, at a whim because they're trying to win an election completely changed the path of a very, very volatile inflation environment.

[00:35:26] Yeah.

[00:35:26] Okay. So let's talk about variable rate holders. Um, how are they going to be affected? So for the 50 bit BIP cut, we'll bring some immediate relief for those who are on, um, variable payment variables, I guess, static payment variable.

[00:35:38] So they, they won't feel it. They'll just be paying more principal with a new, yeah. With the new overnight rate at 3.75. Again, I think a lot of those were kind of prime, prime minus 90 from that, that, um, environment. Would that be correct pricing? Probably that you can expect your monthly payments to decrease slightly. You know, it's going to be like 40 bucks or something like that on the average.

[00:35:56] I think like 30 per every hundred thousand. Yeah. So, but enjoy that, you know, go spend some money in the economy.

[00:36:01] Yeah. Go spend 30 bucks a month. Um, yeah. I mean, you're totally right then. This is overall.

[00:36:08] Good news for, for certain mortgage holders. It's important to remember that the variable rates change quickly. The right of inflation doesn't ease or if economic conditions shift, the bank of Canada could potentially reverse its policy and even raise rates again, leaving variable rate borrowers exposed to future hikes.

[00:36:27] Now, again, this is purely theoretical. I'm not saying that is going to happen whatsoever, but again, this is a moving target. And as Tiff made very, very clear, they will be analyzing the data as it comes out and making their decisions based off of that.

[00:36:41] So, Dan, do we need to maybe talk about a quick impact to overall housing market, you know, buyers and whatnot. And then we can touch on the TD stuff.

[00:36:50] Yeah. So lower interest rates typically boost, uh, the housing market activity by making borrowing cheaper. However, with housing prices already have elevated in many parts of Canada, the rate cut might not be enough to spur significant increases in home ownership, especially with the stress test in place.

[00:37:04] So again, you're qualifying plus 2% or at minimum of 5%. And then, uh, you also have most buyers using a five, three or three to five year fixed mortgage. So their, their rates are really dictated by the bond market, not, not the bank of Canada. And so I don't think it really matters. So why don't we jump over here and we'll, we'll, um, answer the question.

[00:37:24] Question everyone wants to know, which is when are house prices going to go up, Nick? When are, when are these, when are these rate cuts finally going to do something?

[00:37:32] Let me get my crystal ball out here. Uh, wow. It's branded TD. This is weird. Uh, okay. So according to TD, it could happen faster now, but it's nothing to do with the bank of Canada, which is surprising. It will likely be more of a result of CMHC's recent changes.

[00:37:49] And those changes being referenced are to increase the CMHC insured mortgage limit from $1 million to $1.5 million, uh, and also extend amortizations. This means buyers can now qualify for a mortgage with less than 20% down payment on homes priced up to 1.5 million, making it easier to access higher price properties.

[00:38:07] Yeah. Huge news. And TD, of course, just dropped a full report on this. The federal government is rolling out some pretty significant changes in December 15th of this year, 2024. So Dan, can you give me a couple of the quick highlights here? What are we looking at?

[00:38:21] Yeah. So they're predicting a boost to home sales and prices next year, but they're not expecting a full on housing boom. It's more like a secondary tailwind to a market that's already recovering, kind of finding its bottom. So it could just be like a general turnaround, but they, they, they seem to think that it's going to kind of move that growth up into Q1 or, or say the first half of next year.

[00:38:41] Yes. Okay. So let's break it down even, even further. For me, the amortization changes is something that, that really is, is a big deal, but, but from your perspective, how big of a deal is it?

[00:38:52] Yeah. So TD estimates it could increase purchasing power, power by about 9% for the typical first time home buyer.

[00:38:58] Okay. Now if you were in call, if you are a dedicated show listener, we did mention several podcasts ago when this first came out that we thought it could be about 8%. So, so not far off.

[00:39:08] Yeah. And the catch is kind of that it, it only applies to first time home buyers with insured mortgages, which is kind of a small, it's a pretty specific group, right? It's a, it's a niche we could call it.

[00:39:21] Yeah, for sure. Okay. And what about the higher cap for insured mortgages? That sounds like it could really have a bigger effect on certain parts of the country, namely very expensive places like Toronto, the GTA, Vancouver, and the lower mainland.

[00:39:36] Yeah, definitely. So TD thinks about 20% of homes in Canada are priced between one to 1.5 million. The GTA and GVA markets should obviously most see the benefit from this policy. And it really seems like it's policy aimed specifically at those markets, to be honest with you. But again, it's mainly only going to impact first time or owner occupied buyers.

[00:39:55] Right. Okay. Really interesting stuff. So what's the bottom line here? Are we looking at a major market shift based off of these changes? Maybe these changes combined with the, with the interest rate cut?

[00:40:05] Yeah. So they've been saying that by the end of 2025, both, both home sales and average prices could be about two to 4% higher than they would have been without these changes. So they're expecting it to have a pretty material impact on, on price growth.

[00:40:19] But they're also saying that by the end of 2026, a lot of that initial boost might be eaten up by affordability erosion. So basically what would happen is the policy will come out, everybody will jump to get into the market because all of a sudden they just got $500,000 more potential buying power.

[00:40:36] And then that'll push prices up early next year. And then by the middle of next year, prices will be too high for it, for the, all of those new people to be able to afford those increased prices and they'll start leaving the market or not being, you know what I mean? And so.

[00:40:51] Or the government just raises to 2 million and we keep pushing up enough.

[00:40:55] Well, that, and that's like where the, you know, that's the next crazy part, which is in January, you do get that, the owner occupied multiplex program starting as well.

[00:41:03] Right. Right. Okay. So lots for both the average Canadian consumer to consider here, but lots for investors to think about as well. Can you give me some of your kind of final takeaways, final thoughts on, on this TD report here?

[00:41:17] Yeah. So they mentioned some potential financial stability concerns. So they have some really good charts on the site. I've shared them on my Twitter, but I would encourage people to go take a look.

[00:41:25] Um, but basically, um, first time home buyers have larger loans and could more frequently leverage the rule changes. So again, these are policies that are targeting bigger, let's call it loans, right? Larger loans.

[00:41:37] They also note that borrowers with larger mortgages are more likely to be financially stressed. So again, not something that you, you want to see. And so that, that could increase the, the risk in the market. And so, so they aren't huge fans of the policy and it's been criticized. The policy has been criticized in that way and they've sort of criticized, but there's, there are some other criticisms as well. Right.

[00:41:58] Yeah. I mean, the, the criticism is basically just moving up the demand curve for entry level homes, which of course will put, uh, inflationary pressure on overall house prices.

[00:42:10] Yeah. So, and let me, let's just, let's just zoom in on that. So it would increase the purchasing power, right? By allowing buyers to qualify for larger mortgages with smaller down payments, more people can afford now higher priced homes. This effectively increases the demands for homes in those higher price ranges, but it also lowers the barrier to entry, right?

[00:42:28] How does it do that?

[00:42:29] Yeah. I mean, the reduced down payment requirements make it easier for more people to enter the housing market, particularly for more expensive properties, again, pushing that curve. And this increases the pool of potential buyers that pushes that demand curve for those more expensive homes up.

[00:42:45] Yeah. It would also expand, like, I guess what you're, what you're describing as an expansion of that market, right? So it would expand the market for these types of properties, likely increasing the demand in that price segment above a million. And right now you can really feel this. Like this is,

[00:42:58] it's visible in the market. There's so much demand for property price below a million dollars, and there's very little demand for properties priced above a million dollars. So it's almost like the policy is designed to save that end of the market a little bit.

[00:43:09] For sure. And I mean, that's exactly what it's going to do, right? It's going to stimulate that higher end because it's going to make people, it's going to make it easier for people to purchase those homes that are at that 1 million, not that 999, 999, but that 1 million to 1.5 million range, potentially lending or leading, sorry, to increased prices in this range, right?

[00:43:28] So more people are going to, you know, people by design were pricing their houses just under a million to capture that buyer group. But now that buyer group can spend another $500,000. So Dan, finish me off with the overall market impact here.

[00:43:44] Yeah. So as more buyers enter the market and more existing buyers can afford more expensive properties, it basically shifts the entire demand curve for housing upward, potentially leading to higher prices, which is kind of where TD arrived at this conclusion. So I don't know. I mean, generally, I think, you know, the whole thing right now is everybody's, they're throwing the kitchen sink at trying to fix the problems that we're seeing in the market.

[00:44:05] I'm interested to see if it's going to work. I'm interested to see if TD is correct, but the analysis is crucial from my perspective. So keep an eye on the Bank of Canada, keep an eye on the US Fed, keep an eye on unemployment. I think unemployment is probably the biggest thing to watch from my perspective.

[00:44:20] Yeah, for sure. I mean, I think my closing on the TD pieces, the policy is effectively just an expansion of credit availability, which usually results in increased demand. We're already so in debt. A lot of these policies just seem to be making debt easier to come by. So anyways, I think we should probably stop it there. Tons of stuff to take away from this episode.

[00:44:46] Hope everyone listening got a ton of value out of it. If you have any further questions, concerns, or you think we missed something, reach out to the show. We love to hear from you, our wonderful listeners. Thank you so much. We'll see you next time.

[00:45:00] The Canadian Real Estate Investor Podcast is for entertainment purposes only, and it is not financial advice. Nick Hill is a mortgage agent with Premier Mortgage Centre and a partner in the G&H Mortgage Group. License number 10317. Agent License M21004037.

[00:45:23] Daniel Foch is a real estate broker licensed with Rare Real Estate, a member of the Canadian Real Estate Association, the Toronto Real Estate Board, and the Ontario Real Estate Association.