There she be

Thunk.

That’s the other shoe dropping. Yesterday the first hit the floor as Ottawa desperately unveiled 30-year mortgages and a ballooning of mortgage insurance to cover $1.5 million buys. No, houses are not cheaper as a result. But financing one is. And that ensures real estate will get more expensive. Duh.

Today, the other boot landed.

Inflation has dropped sharply to exactly where the bank of Canada wants it, and months earlier than expected. The 2% rate beats market expectations, is a giant drop in just a month, represents a total win for Tiff, and will be bringing cheapo mortgages to the tired masses. Will they bite?

“Out of nowhere, inflation is suddenly below target at 1.95% — at least technically speaking (StatsCan rounds to 2%),” says mortgage guru Rob McLister. “The overnight rate has no business at 4.25%, and the Bank of Canada knows it. Canada’s benchmark prime rate might fall quicker than expected.”

It will, if economists are right. They rewrote their forecasts earlier today as bond yields were falling and Mr. Market geared up for a fat rate cut coming on October 23rd. “The bottom line is that inflation remains unthreatening,” says BMO Economics, “and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate. We continue to forecast a further 200bp of interest rate cuts between now and the middle of next year.”

That would take the current rate down to 2.25% within nine months. The prime rate at the banks would be less than 4.5%. Variable-rate mortgages might well be close to 3%. And you can bet there will be fixed-rate mortgages flogged for 2.99%. This means that big renewal cliff everyone worried about a year ago – with $200 billion in home loans coming due in 2025 and 2026 – has been called off. Looks like borrowers with an average existing rate of 2.89% may be refinancing for about the same amount. Amazing.

As inflation hits target, key bond yield plops

So the risk for central banks has changed dramatically. It’s not inflation. Now we’ve caught a whiff of deflation. If the CPI in today’s environment of high rents and elevated mortgage interest can crash to 1.95%, then when shelter costs diminish, we could be in negative numbers.

In fact last month prices declined – actually fell – in five of the eight categories that are measured in determining the cost of living. Meanwhile our unemployment rate has ticked relentlessly higher, so the CB is more worried about undershooting the inflation target as exceeding it.

What a dramatic turn of events. It make a fool of those who campaigned for Tiff Macklem’s head on a stick or blamed the Bank of Canada for causing inflation, then failing at monetary policy. Prices went up globally after the pandemic depressed demand and production. Now Canada has become a leader among nations in corralling high consumer prices and will be dropping the cost of debt dramatically.

Odds have popped for a half-point cut next month and likely another in December. Tomorrow (Wednesday) the US Fed will chop for the first time in four years, and already has a policy rate more than a full 1% above ours. This helps explain our weaker dollar, but also the outsized performance of utilities, REITs, preferred shares and bonds in your B&D portfolio. Now, as the cutting continues, equity markets in general and banks in particular are expected to swell.

As for real estate, well, ya know what’s in store.

It’s impossible to have a new house-buying tax shelter created, for the government to pump billions into favouring houses, for mortgage lending rules to be gutted and the price of home loans to plunge without increasing demand. It’s all intended to do that. This is what political leaders want – to protect the equity of homeowners but at the same time make getting into debt easier for new buyers.

It’s their only play left.

About the picture: “Here’s a picture for if you run low on dog shots again,” writes Corey. “Hopefully the resolution is good enough. This is Frank, ecstatic at how the recent rate cut will affect the upcoming renewal on his bachelor unit.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/09/17/there-she-be/