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Robert McLister: Triple optimism could shake up Canada's real estate market
Published September 20, 2024 • Last updated 1 day ago • 4 minutes reading time
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The gifts the Canadian real estate market received this week will last well into 2025, writes Robert McLister. Photo by PETER J. THOMPSON/NATIONAL POST FILES
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They say good news always comes in threes. I don't know if that's true or if it comes from the same branch of science as astrology, but that's what happened with mortgages this week.
First, Ottawa announced a spectacular relaxation of mortgage insurance regulations. Second, inflation surprised economists by falling below the two percent mark. Third, the US Federal Reserve threw a party for the markets with a massive interest rate cut.
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All of the above events occurred within a short period of 75 hours.
Here's a quick look at how this bull market triad could shake up the Canadian real estate market.
Relaxation of mortgage insurance
Out of the blue, the government decided that Canada's credit default swap market needed to be stimulated. Starting December 15, the government will allow those seeking insured mortgage loans to:
- An increase in the maximum permissible property value by 50 percent (i.e. $1.5 million instead of the $1 million set since 2012)
- 30-year amortization for buyers of new buildings
- 30-year amortization for all first-time buyers
The first measure corrects the fact that the value limits for insured homes have not kept pace with the 76 percent increase in home values since the rule was introduced.
The second measure creates a more liquid pool of buyers for new homes and encourages construction, which Canada desperately needs.
The third amendment creates a level playing field for first-time buyers who do not receive down payment support from their family.
All of these initiatives are helping young voters to find their own home sooner. But I would be far from cynical and suggest that the government's strategy is to desperately cling to power by courting disenfranchised homebuyers. I am sure it was just a coincidence that every housing politician I spoke to in the years leading up to this move was staunchly opposed to such measures, fearful of further imbalances in the housing market.
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While the pros and cons of these measures can be debated, there is no denying that the mortgage and real estate industry has just hit the jackpot.
Lenders that rely on insured securitizations to finance prime mortgages, including publicly traded companies First National Financial (TSX: FN) and MCAN Financial (TSX: MKP), are particularly pleased.
Surprisingly low inflation
For months, the Bank of Canada had predicted that inflation would reach the two percent mark by the end of 2025. But on Tuesday, inflation unexpectedly slowed to just 1.95 percent. That's more than three quarters earlier than planned.
Suddenly, the Bank of Canada has more room to cut rates without fear of a revival of inflation. And that's exactly what it's about to do: Markets are pricing in rate cuts of 200 basis points over 24 months, according to forward rate data from CanDeal DNA.
Such a decline would dramatically reduce payments and make buying a home more attractive compared to renting. It would also reduce borrowers' debt-to-income ratios, making mortgage qualification significantly easier. The resulting additional demand could consume much of the inventory that has built up since 2022.
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The Fed's mega interest rate cut
Nine out of ten economists had expected the US Federal Reserve to cut interest rates by only 25 basis points on Wednesday. Although the US economy is in “good shape” (in the words of the Fed), the central bank instead opted for an oversized cut of 50 basis points. Apparently, US politicians fear that the economy is more fragile than claimed.
A 50 basis point rate theoretically allows the Bank of Canada to cut rates even further, since it doesn't have to worry about a widening interest rate differential between the U.S. and Canada, which could send our currency into the abyss. And both the Bank of Canada and the Fed will accelerate their rate cuts if they see an increase in unemployment, which I think is quite likely.
Economic stimulus for the real estate market
Many of us in the real estate analytics industry thought falling interest rates would stimulate the real estate market more than they did, but most potential borrowers either fail the government's stress test or are unable to afford the minimum down payment.
Moreover, history shows that the first rate cuts often do not spur home purchases. It takes time for incomes to rise, affordability to be restored, immigration to boost demand, rising unemployment to level off, and so on.
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This week's trio of positive mortgage events should give the housing market a boost in the first quarter or sooner. However, as with any monetary easing, some buyers will try to act prematurely and get ahead of the crowd – as if running to the buffet before it opens.
Rising demand is slowly improving affordability. The housing market has been in a sideways correction for two years. Lower prices and rising incomes have quietly had their effect in the background. For example, a typical home for dual-income households with an average weekly wage now costs just 4.2 times gross income. This is down from 5.9 in February 2022.
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Mortgage rates are falling rapidly and there will be much more relief
Can property prices go down before they go up? Theoretically yes, but the lower the prices, the more opportunity buyers have when values rise again. The gifts the property market received this week will stay with us in 2025.
Robert McLister is a mortgage strategist, rates analyst, and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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Want to know more about the mortgage market? Read Robert McLister's new weekly column in the Financial Post and find out the latest trends and details on financing opportunities you can't miss.
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Mortgage interest rates
The rates shown below are updated by the end of each day and are taken from the Canadian Mortgage Rate Survey by MortgageLogic.news. Postmedia and Imaginative. Online Inc., the parent company of MortgageLogic.news, receive compensation from certain mortgage providers when you click on their links in the charts.
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