It’s Canada’s worst-kept economic secret.

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Would-be homebuyers are in limbo and only the Bank of Canada can free them Back to video

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Tens of thousands of prospective homebuyers have their fingers hovering over the “buy” button. But they’re waiting for one thing before pressing it: the Bank of Canada to give rates a haircut.

A BMO poll by Ipsos throws a hard number at us — 72 per cent of Canadians won’t buy until rates come down.

Buyers are sitting on their wallets for two big reasons: First, thanks to record unaffordability, people need lower rates to pass the government’s mortgage stress test — which forces borrowers to prove they can handle payments at rates that are 200-plus basis points (bps) higher than the contract rate.

Lower mortgage rates help in that sense, given they lower payments and therefore reduce the percentage of income devoted to payments. Every percentage drop in average rates beefs up buying power by over eight per cent. That injects over $50,000 into peoples’ maximum home-buying budgets based on Canada’s average home price.

Secondly, more buyers need to believe that it’s safe to go back into the water. That’s particularly true for those who think we’ve got a date with recession and higher mortgage defaults (despite the fact leading economic indicators are turning higher). It’s also true for investors who believe they’ll buy cheaper if inflation returns, immigration gets cut back and new rental supply causes rents to dive.

There’s always some share of homebuyers with such anxieties, and there’s validity to some of these risks. Suffice it to say, however, rate cuts would go a long way toward offsetting such concerns.

Meanwhile, governmental home-building efforts are moving at the speed of a Toronto traffic jam — don’t expect a payoff for several quarters. As of the latest CMHC data, we’re only hammering out half the homes needed to meet long-term demand.

Helping that demand is the fact paycheques keep swelling. Every 12 months since the pandemic, average weekly earnings have risen roughly 4.4 per cent. Of course, if the economy heads south as many expect, job losses will mount, but if history is a guide, it won’t last for years, and job losses will disproportionately affect renters over homebuyers.

For these reasons, some buyers are jumping the gun — getting in while they think the getting’s good. While we’re back up to 4.22 months of inventory nationally, the highest since March 2020, average home prices are up five months in a row. Average prices can be misleading because the types of homes people buy change, which affects the calculation, but they’re often decent leading indicators of more accurate benchmark prices.

Looking ahead

Trying to predict home prices is like trying to pin the tail on a donkey after chugging a two-four. Even our housing agency, central bank and realty firms can’t forecast consistently with accuracy.

That said, you don’t have to be Nostradamus to make certain bets about the foreseeable future:

1. Thanks to non-stop immigration, household growth will keep barrelling higher.
2. Core inflation will likely continue easing, allowing mortgage rates to fall by year-end.
3. Given high interest rates, low new construction pre-sales, counterproductive municipal regulations and high building costs, home supply will continue lagging household growth.
4. Incomes will likely keep rising above inflation.
5. Strong stock markets and corporate profits could keep wealth effects alive, bulking up the bank accounts of prospective buyers (or their family benefactors).

The counterpoints are that, most likely:

• Defaults will keep rising despite being 46 per cent below the long-run average.
• Unemployment will keep climbing despite affecting homebuyers less than renters.
• Lower rates will draw out home sellers.
• Re-inflation remains a risk to mortgage rates.

All that said, the bulls could ultimately gain the upper hand in this rodeo. They’ll likely continue being prodded by Canada’s chronic supply-demand imbalance, falling mortgage rates and a near-religious faith that Canadian real estate can’t lose. If true, most markets won’t see home prices go on sale by much, if at all.

While that “can’t lose” mentality makes me shudder, it’s like trading Nvidia stock. Fading the trend can prove expensive.

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

Want to know more about the mortgage market? Read Robert McLister’s new weekly column in the Financial Post for the latest trends and details on financing opportunities you won’t want to miss

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