October 21, 2024 | Jumbo Cuts

Happy Monday Morning!

Some good news on the inflation front. Headline CPI cooled to 1.6% in September, slower than the median estimate of 1.8% in a Bloomberg survey of economists. For the first time since February 2021 inflation is now below the central bank’s 2% target and has been within its target range for nine straight months. Inflation, after running hot for several years is now firmly in the rearview, but job losses are picking up steam and heading right towards us, travelling northbound on a southbound highway.

There’s a growing consensus that the Bank of Canada needs to deliver jumbo rate cuts, and swiftly.

“With back-to-back lower inflation reports and third-quarter gross domestic product poised to come in well below the Bank of Canada’s forecast, BMO is changing our call for next week’s meeting,” – Benjamin Reitzes, Bank of Montreal

“Given the weakness in the economy, it’s clear that our 50 basis-point rate cut call will become the consensus,” Royce Mendes, Desjardins

“A 50 basis-point cut is warranted. This is the final signal they’ve been waiting for to shift their stance and recalibrate towards a lower policy rate.” – Andrew DiCapua, senior economist at Canadian Chamber of Commerce

“The totality of the data should be enough to persuade the Bank to cut by a larger 50 basis points next week.” – Stephen Brown, Capital Economics

“I would really bet on 50 basis points,” – Paul Beaudry, former deputy governor at the Bank of Canada

So there you have it. Financial Markets are pricing in nearly 90% odds that Tiff and Co will deliver the goods, a jumbo rate cut on October 23rd. That would bring most variable rates under 5%, getting them closer in line to where the bond market has already priced fixed rate mortgages.

At some point you have to think this will filter through into the housing market. After all, nothing shifts sentiment more than lower rates. It appears the antidote is finally working through the system. There’s been a noticeable uptick in the resale housing market over the past three weeks. Previously stale listings are now getting showings… and offers. Buyers, are coming back into the water, albeit one toe at a time.

Make no mistake, this is no bull market, but it’s progress, and, perhaps a jumbo cut could accelerate those animal spirits.

Notice that I only referenced the resale market. There is seemingly no saving the new development market at this stage. It’s going to take a lot more than a few rate cuts to get investors, who have been mentally and physically scarred, back to the table. They’ve completely disappeared in the GTA where recent data reported by Urbanation shows year-to-date new condo sales totalled 3641 units as of the end of Q3, on track for its slowest year since 1996. Unsold new condo inventory increased 16%, rising 56% above the latest 10-year average. Unsold inventory was comprised of 11,629 units in pre-construction projects, 11,356 units in under construction projects, and 933 units in completed projects.

If you’re wondering why finance minister Freeland decided to loosen up CMHC lending requirements a few weeks ago, look no further. This is a crisis, and it’s unfolding right in front of us.

Here’s year to date new housing starts in the GTA and Vancouver. Plunging.

Remember, this is housing starts, which means the developer already sold enough units to satisfy bank financing requirments. A lagging indicator. Building permits are even worse.

If policy makers want more shovels in the ground they’ll need more than Tiff Macklem pulling the rope. Cities are heading to the chopping block next, forced to reduce fees and offer concessions to developers or watch tax revenues (development fees) evaporate. As they say, a little bit of something is better than nothing.

Remember when the City of Burnaby was approved for $43M of “housing accelerator” dollars earlier this year and then immediately raised development fees by nearly $50K per unit? We do.

Now that new development has come to a standstill they’re attempting to get a little bit of something as opposed to nothing.

Burnaby announced sweeping changes to its oft-touted affordable rental policy to keep developers building in the city.

Once called “sacrosanct,” the policy originally required developers to build 20% of a development as below-market rental units to be rented at rates 20% below the market median for the neighbourhood.

Council voted to reduce the policy from 20% required non-market rentals to 15%, and changed the below-market rates. Now 10% of the units will need to be rented at 20% below the median and the remaining 5% at the median.

It’s worth noting the median rent is based off CMHC rental numbers which lag horribly behind the real world, but that’s a conversation for another time.

It’s cutting time, and Tiff won’t be the only one.

Steve Saretsky October 21st, 2024

Posted In: Steve Saretsky Blog

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