by Conrad Zurini | Owner and Broker of Record
I love the holidays! Last year’s holiday break was super chill for my family and I. Christmas fell on the Sunday which meant extra quiet time at home, Monday and Tuesday. Although looking back now, it was the calm before the storm...
The 6 months prior to the end of the year proved to be challenging for buyers, sellers and of course, us REALTORS®. Mortgage rates were skyrocketing (4 percentage points to be exact), and home prices seemed like they were in free fall. With all that going on, there was talk of the looming 'R' word... a Recession. However, the Canadian consumer was too busy trying to make sense of it all and were more concerned about making ends meet and navigating rising interest rates.
There was this tiny voice in the media that kept talking about a recession looming, and whether it would be long, short, soft or a hard landing. The funny thing about a recession is that we could be 6 months into one or 6 months out of one and no one would even know. The economy is like a big ship, it moves slowly from one direction to the other in order to steer away from a major obstacle. The captain must look well in front of it to be able to steer clear. In other words, what the central banks do today won’t show up in the economic data for months, or even years.
Let’s go back to the holidays, this year my circle of friends and family (my mom excluded, I did really like the gift she got me) decided to not buy each other gifts. The reason to not purchase gifts this year, was that we all agreed we didn’t need anything and that gift giving is wasteful. Since when does buying a gift fulfil a need? I need antiperspirant, but I don’t think anyone would get me that as a gift. A gift is frivolous and whimsical, it's something that you wouldn’t buy yourself. Not 'needing anything' is just a rouse for 'let's conserve our resources because things might get tight down the road.' See how the ‘R’ word plays with our psyche?
Central Banks like the Bank of Canada and the US Federal Reserve are charged with one thing and one thing only, the steward of inflation. They were like me and my relationship with the snooze button. I wake up pretty early every day, and I set my alarm an hour earlier, you know why? Because I love the luxurious 10 extra minutes that I get when I gently reach over and press snooze. Those 10 minutes are what sweet dreams are made of; it may be psychological, but I find when I cheat my alarm and steal extra time, it is so gratifying. The alarm bells were ringing early on when it came to inflation, we saw signs of it in late 2020, but the BOC and the Fed kept pressing the snooze button. When it was time to wake up, they used a sledge hammer to turn off the alarm.
Now For The Good News
There was so much data floating around that made January 25th’s quarter point rate hike inevitable. Employment numbers were very strong in December, (what’s wrong with 5% unemployment?) and the BOC hates a tight labour market, and inflation. Though moving in the right direction, inflation is still stubbornly high. However, the interest rate pause is around the corner. Current economic data shows us that if we were to go into a recession, (barring any more rate increases) it would be mild, because of strong employment and excess consumer savings. Many economists argue that inflation will drop from 7% to 4% relatively quickly, like we have seen in the US (from 7.11% to 6.45%) and most recently in Canada (from 6.8% to 6.3%). However, the last mile from 4% to 2% is going to be where there will be some heavy lifting. Does that mean the pause on rates is much longer than we expect? Well maybe, and that once we are there (at 2% inflation), rates could stabilize between 3% to 4%.
What’s All The Fuss About?
According to the Canadian Real Estate Association, home prices are 33% higher than in 2019, (pre-pandemic). Let’s all agree that the pandemic was a game changer; emotions were high, certainty was low. Many who bought during this period had seismic changes to their lives, especially the movement from the office to home. No one could travel so your home quickly became the centre of your work and leisure life. We can’t fault people for making decisions because their individual circumstances changed, during an unprecedented event. Today life goes on and many people’s situations are still changing and driving the real estate market. The last 9 months, the real estate market was in a holding pattern as consumers got their heads around 7 interest rate hikes, and home prices re-adjusting. Rest assured the uncertainty of the market has began to be flushed out, I have a theory it takes 9 months (like pregnancy!) for new life to enter the market which is driven by personal circumstance.
The Wild Card….An Election in Canada.
Is it fact or fiction that there has never been a mortgage rate increase prior to a US presidential election? I have poured over some data and found it to be very random. So I went to the year that is the granddaddy of mortgage rate increases, and the run up to 18.44% in the US. In October 1981 (Canada had a similar interest rate event as well in the early 1980’s) almost one year after the election of Ronald Reagan on November 4th 1980. In February of 1980, rates in the US were 12.85%, in April they went as high as 16.35%, and by July the height of summer campaign barbecue season, they dropped to 12.85%. Ronald Reagan was leading in the polls against Jimmy Carter, and was positioned as a leader who could turn the economy around, amongst other things. By November 7th 1980, rates had settled at 14.08% and began to escalate in early 1981. Ironically one thing all economists agree on is that the economy in the US will be in full swing, with inflation at 2% by 2025, just in time for you know what….the US presidential election. In Canada we had an election on February 18, 1980 where Brian Mulroney beat the incumbent Pierre Eliot Trudeau. Inflation was at 9.14% in 1979, and at 10.13% in 1980, and had steadily climbed from 1976. Interest rates were 12.10% in 1979 and 12.89% in 1980. It wasn’t until after the election in 1981 that the bank rate climbed to 19.93% and prime rose to 19.29%. Is this coincidence that the BOC and The Fed sat on the sidelines when inflation was going through the roof? Did someone bench the BOC and The Fed during this period of political transition? Is there any influence from the federal government on Central Banks? Time will tell, and if the Liberals are forced into losing power due to a non-confidence vote this spring, keep an eye on the overnight rate, Christmas could come early for the Canadian Home Buyer and Seller.
Affordability is Coming Back To The Market
What is uncanny to me is the tale of the two markets in 2022, Q1 and Q2 were all about FOMO (fear of missing out), and Q3 and Q4 were all about FEAR. The good news is that the market really opened up for first time buyers, bringing prices down which means lower monthly payments (even with higher mortgage rates) and lower down payments. When rates were low and prices were high, raising a down payment became the ‘impossible mountain to climb’. When rates began rising, the monthly payment became the ‘impossible mountain to climb’. When the market was fast and competition was furious, getting the house was an ‘impossible mountain to climb’. Now that we have come close to the end of the ‘rising rate cycle’ and prices are stable, if a REALTOR® finds a buyer the house (something they just ‘had to have' in February of 2022), they don’t pull the trigger. How does that make any sense??? 11 months ago the home that was 1.2 million dollars needed 20% down ($240,000.00), is now $990,000.00, and can be purchased with 5% down ($49,500.00)….What am I missing???
This is the first time in my business life where I have learned so much information about what the Bank of Canada is going to do next. Stop trying to find the bottom of the market, and the end of rate hikes!!! The market has really began to stabilize, and we have all the information you need when it comes to mortgage rates. There are 2 strategies for success with rates, barring we do not see a repeat of 1978 in Canada described above. Inflation kept going up and the BOC responded, but eased off (they thought they had hammered inflation enough or they were subject to political influence), then in 1981 rates took off again.
Strategy #1 - Look at the 1 and 2 year closed rates which may be high, but the great thing about those mortgages is that you can renew as early as 6 months prior to your maturity date, which gives you some runway to lock into rates.
Strategy #2 - Don’t do anything if you currently have a variable rate mortgage. Since 1975 there were only 4 years when the 5 year rate was better than the variable rate. Also according to Robert McLister (Globe and Mail January 27, 2023), when the prime rate (TD 6.85%) is more than 20% above the 5 year average (TD 5.54%), “there is a less than 1 in 7 chance that locking in long term is the right move”. As long as you can stomach the ride, and play the odds, go with this strategy. Where is Consumer and Business Sentiment When It Comes to the ‘R’ Word The Bank of Canada just released (January 16, 2023), the results of a survey on Consumer and Business Expectations as of Q4 2022, with some very interesting results. Most businesses felt that the supply chain issues and labor shortages were easing. Most consumers surveyed felt that inflation will ease by the end of next year and into 2024. Most consumers and businesses “expect a mild to moderate recession.” Also a larger percentage were going to put off larger purchases, with nearly 15% saying they will make purchases sooner. Remember this survey was taken during a second consecutive rate increase of 50 bases points, which would curb results.
Stop Judging The Market by a Single Good or Bad Quarter
So let’s stop judging the economy or the real estate market by just one quarter or 6 months for that matter. In the US, (possibly Canada as well) the fourth quarter of 2022, was the worst ever recorded in real estate sales history. Should we take that quarter and apply it to the whole real estate market going forward? Same goes for Q1 of 2007, Q1 of 2009, Q1 of 2017, Q1 of 2018, or Q1 of 2022 for that matter. The market is fluid and finds its own rhythm, just like I have been told many times, that I have the rhythm of Elaine Benis (Julia Louis-Dreyfus), from Seinfeld. I dance to my own drum, and so do all of us. Remember service providers like us are in the human behaviour business, it's beholden upon us to educate in order to empower our clients to make a decision, to whatever the rhythm they possess.