The Bank of Canada is keeping would-be homebuyers in limbo

0
53
Financial contribution

Breadcrumb trail links

Robert McLister: Buyers are sitting on their wallets and it looks like rate cuts are the only thing that will change that

Published on May 17, 2024Last updated 3 hours ago3 minutes reading time

You can save this article by registering for free here. Or log in if you have an account.

A residential street in Vancouver, BCAccording to the Real Estate Board of Greater Vancouver, data on home sales activity last month suggests a possible renewed interest among sellers to participate in the market as the number of homes changing hands increased compared to last year. Cherry blossom trees line a residential street in Vancouver on Tuesday, April 4, 2023. THE CANADIAN PRESS/Darryl Dyck Photo by Darryl Dyck/The Canadian Press Files

Article content

It is Canada's worst-kept economic secret.

Tens of thousands of potential home buyers hover their fingers over the “Buy” button. But they're waiting for one thing before they push for it: for the Bank of Canada to cut interest rates.

Article content

A BMO poll from Ipsos provides a hard number: 72 per cent of Canadians won't buy until interest rates fall.

Buyers are sitting on their wallets for two big reasons: First, record unaffordability means people need lower interest rates to pass the government's mortgage stress test – which forces borrowers to prove they can make payments at rates above 200 basis points (bps). higher than the contract rate.

Advertising 2

This ad has not loaded yet, but your article continues below.

THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLY

Subscribe now to read the latest news in your city and across Canada.

  • Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, Victoria Wells and more.
  • Daily content from Financial Times, the world's leading global business publication.
  • Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.
  • National Post ePaper, an electronic copy of the print edition that you can view, share and comment on any device.
  • Daily puzzles including the New York Times Crossword.

SUBSCRIBE TO UNLOCK MORE ARTICLES

Subscribe now to read the latest news in your city and across Canada.

  • Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, Victoria Wells and more.
  • Daily content from Financial Times, the world's leading global business publication.
  • Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.
  • National Post ePaper, an electronic copy of the print edition that you can view, share and comment on any device.
  • Daily puzzles including the New York Times Crossword.

REGISTER / LOGIN TO UNLOCK MORE ARTICLES

Create an account or log in to continue your reading experience.

  • Access articles from across Canada with one account.
  • Share your thoughts and join the discussion in the comments.
  • Enjoy additional articles per month.
  • Get email updates from your favorite authors.

Log in or create an account

or

Article content

Lower mortgage rates help in this sense because they lower payments and therefore reduce the percentage of income that goes toward payments. Every percentage decrease in average interest rates increases purchasing power by over eight percent. Based on the average house price in Canada, this increases the maximum budget for purchasing a home by more than $50,000.

Second, more buyers need to be convinced that it is safe to go back into the water. This is especially true for those who believe a recession and higher mortgage defaults are imminent (despite the fact that leading economic indicators are rising). This also applies to investors who believe they will buy cheaper as inflation returns, immigration is reduced and new rental offers lead to falling rents.

There will always be a certain proportion of homebuyers with these fears, and some of these risks are legitimate. Suffice it to say, however, that rate cuts would go a long way toward addressing these concerns.

Meanwhile, government housing efforts are moving along at the speed of a Toronto traffic jam – you can't expect this to pay off for several quarters. According to the latest CMHC data, we are only eliminating half of the homes we need to meet long-term demand.

Top stories

Top stories

Thanks for registering!

Article content

Advertising 3

This ad has not loaded yet, but your article continues below.

Article content

Contributing to this demand is the fact that paychecks continue to increase. Since the pandemic, average weekly earnings have increased by about 4.4 percent every 12 months. If the economy weakens as many expect, there will of course be a spike in job losses, but if history is anything to go by, that won't last for years, and job losses will hit renters disproportionately more than homebuyers.

For these reasons, some buyers jump the gun and jump in even though they think the sale is going well. While we're back at 4.22 months of inventory nationwide, the highest level since March 2020, average home prices have increased for five months in a row. Average prices can be misleading because the type of homes people buy changes, which affects the calculation, but they are often good leading indicators of more accurate benchmark prices.

looking ahead

Trying to predict real estate prices is like trying to pin a donkey's tail after it's chugged a two-four chug. Even our housing agency, our central bank and our real estate companies cannot provide consistent and accurate forecasts.

However, you don't have to be Nostradamus to make certain bets about the foreseeable future:

Advertising 4

This ad has not loaded yet, but your article continues below.

Article content

  1. Thanks to continued immigration, household growth will continue to rise.
  2. Core inflation is expected to continue to ease, meaning mortgage rates will fall by the end of the year.
  3. Given high interest rates, low pre-sales of new homes, counterproductive municipal regulations and high construction costs, housing supply will continue to lag household growth.
  4. Incomes will likely continue to rise above inflation.
  5. Strong stock markets and corporate earnings could keep wealth effects alive and boost the bank accounts of potential buyers (or their family benefactors).

The counterpoints are most likely:

  • Defaults will continue to rise, although they are 46 percent below the long-term average.
  • Unemployment will continue to rise, even if homebuyers are less affected than renters.
  • Lower prices will attract home sellers.
  • Renewed inflation remains a risk for mortgage rates.

All in all, the bulls could ultimately come out on top in this rodeo. They likely continue to be driven by Canada's chronic imbalance between supply and demand, falling mortgage rates and an almost religious belief that Canadian real estate can't lose. If this is true, home prices in most markets will not skyrocket much, if at all.

Advertising 5

This ad has not loaded yet, but your article continues below.

Article content

Recommended by Editorial

  1. True North Mortgage and Marathon Mortgage offer affordable six-month fixed rates on insured mortgages.

    The inflation figures could lift the mortgage market out of the doldrums

  2. When you look at the numbers, it seems almost impossible for young people today to save for a home.

    In Canada, saving for a down payment is nearly impossible

This can't-lose mentality makes me cringe, but it's like trading Nvidia stock. Letting the trend fade can prove costly.

Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X below @RobMcLister.

Would you like to learn more about the mortgage market? Read Robert McLister's new weekly column in the Financial Post for the latest trends and details on funding opportunities you won't want to miss

Bookmark our website and support our journalism: Don't miss out on the business news you need to know – bookmark Financialpost.com and sign up for our newsletter here.

Article content

Share this article on your social network