Yesterday we discussed the rash thing that tuba-playing, cowboy-punk loving former YVR mayor and spouse of a climate and racial action advocate, Gregor Robertson, had to say about house prices.
Will they come down, Minister?, he was asked.
“No,” he replied. And then a bunch of other words, none of which mattered as much.
As stated here, there’s no desire on the part of any government to have real estate values crash. They can’t, unless we want a smoky hole in the middle of the economy. Recall that over 60% of the nation’s GDP comes from consumer spending. And if real estate – the basic repository of family net worth – collapses, you know what consumers will do. Panic. Retrench. Circle the wagons. Turtle. Adios, GDP.
So, not happening. Gregor’s being straight with you. No elected person (at least the sane ones) will push policies to destroy homeowners’ equity. That’s why they have latched on to the ‘build, baby, build’ mantra even in the teeth of evidence supply is already overwhelming demand.
Complicating this is the price of mortgages. Like rents, they have been slowly coming down. History tells us repeatedly that when the cost of money falls remarkably, borrowing spikes and house prices are driven higher.
Could this happen again? Like it did during Covid? Instead of whimpering and dying as we were expected to do, Canadians tanked up on cheap house loans and drove property values wild.
We’ll get some sense of this two weeks from tomorrow when the Bank of Canada sets its policy rate. That decision was complicated this morning as the latest inflation number was published. Thanks to Carney peeling back the carbon tax, and a Trump-induced drop in world oil demand, inflation here sank to 1.7% (from 2.3% the previous month).
Yes, that’s below the CB’s target, and would normally suggest rates be cut – especially when the labour market is weak (as we learned a few days ago). In fact, until early this morning most economists were blithely forecasting our guys would cut rates by a quarter point on June 4th, then maybe twice more during the summer and fall.
That would take the policy rate down to 2% – a far cry from the 5% it was pushed up to in order to quell inflation. Variable-rate mortgages would fall immediately, and fivers likely drift down into the mid-3% range at the Big Banks and maybe 2.99% at the souvlaki-and-loans place on the Danforth. In short, enough to rekindle some extra demand in houses, which have slowly melted in price (but are still far above pre-pandemic levels).
But not so fast. That 1.7% is deceiving, say analysts. Look what’s lurking below.
Gas prices were the big driver of the most recent stat, and lately oil has become more expensive. If you exclude energy, inflation last month was a beefy 2.9%, a jump from March. “A big bump in core was driven heavily by food prices,” says BMO, “which have been running hot on a seasonally adjusted basis in the past three months. A weak loonie at the start of the year, and tariffs on some U.S. imports have combined to drive grocery prices northward.”
Trump tariffs are also hitting cars, with prices rising about 3%.
“The big relief from lower gasoline prices in April masked an unfriendly inflation picture beneath the surface,” say the bank economists. “Some of that upswing in underlying prices appears related to the simmering trade war, with food and vehicle prices showing some real power. In other words, there are two conflicting special factors at play here, both of which should fade over time. This leaves the Bank of Canada in a spot, as their two main measures of core are now running at their fastest pace in a year—i.e., back before they began cutting rates. After a weak jobs report handed the Bank a good reason to cut, this back-up in core above 3% pretty much washes that away.”
The boys at CIBC back this up.
“While headline inflation was in line with our forecast, core measures looked stronger than anticipated which puts a question mark over our forecast for a 25bp cut at the June meeting,” they conclude.
The eyes now turn to the next report on how well the economy is doing. Has Trump freaked people out? Is the tariff news making more folks anxious about their jobs? Or the value of their RRSPs and tax-free accounts? Did the federal election just upset everyone as the blues said Canada is broken and the reds claimed we’re under attack?
Dunno. But that sure-thing rate cut in two weeks is now off the table. Mortgages at the banks will stay in the mid-4% range. The spring real estate will continue to bleed out. The standoff between low-ball vultching buyers and stubborn, offended sellers will go on. Prices may erode around the edges – especially for those poor condos – but no crash.
Maybe it’s time to stop expecting politicians to fix this, so they can stop pretending they can.
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