Pause and Reflect
The Bank of Canada made its first rate hike of the year, increasing its key policy interest rate by 25 basis points to 4.5%, sending the prime rate to 6.70%—the highest since March 2001. Adjustable-rate mortgage payments will jump about $14/month, per $100k balance. The federal stress test rate will climb to: 8.7%, 9.2% or higher on HELOCs. 7.5% on the lowest insured variable, and 8.15% on the lowest uninsured variable rate. Markets are pricing in only a 10% chance of another 25 bps on March 8, signalling this may be the last nail in the coffin as they take a pause to monitor how their quantitative tightening filters through the market:
"We know it takes time for higher interest rates to work through the economy to slow demand and reduce inflation. And given the speed and magnitude of the interest rate increases over the last year, their full effect is still to come. With today’s modest increase, we expect to pause rate hikes while we assess the impacts of the substantial monetary policy tightening already undertaken. To be clear, this is a conditional pause—it is conditional on economic developments evolving broadly in line with our MPR outlook. If we need to do more to get inflation to the 2% target, we will." — BoC
Our official inflation rate is still high at 6.3%, yet Governor Macklem says inflation will continue to fade this year, down to 3%, then to their target of 2% in 2024. The labour market in Canada is robust, adding 104,000 new jobs, with an unemployment rate near an all-time low of 5%. We know from history that home sales post strong recoveries in the year following the start of a recession as the economy heals and the impact of falling interest rates unlocks demand. While the housing market and the economy may experience a temporary downturn over the next year, there will be no shortage of demand for housing in the future.
We are not in an income-based market, but a wealth-based market. Anecdotes from industry professionals indicate an accelerating wealth transfer, as many lender files consist of funds being passed down generationally. The "bottom" may be realized this Spring as sales prices recover from a 23% drop in national prices since peaking. Sales volume data will tell the story soon enough, but from a boots-on-the-ground perspective and speaking with colleagues, stale listings are getting multiple offers as we near the end of January.
"Short-term fixed rates will remain the play for the most qualified borrowers. For those who do feel the need to lock in longer than a year, do yourself a favour and pick a lender with a fair prepayment charge. And try to stick to medium terms like a 3-year fixed, as opposed to a 5-year fixed. The reason is simple. With potentially lower rates and economic volatility ahead, the probability of needing to break one's mortgage within a few years has rarely been higher." — Robert McLister
State of the City
Ken Sim held his first "State of the City" address, outlining City Hall's plans for the next four years, and restoring a sense of civic pride. It stood out how he mentioned the feeling we all had during the 2010 Olympics when there was a buzz around the city, and people wore Vancouver on their sleeve like a badge of honour, high-fiving each other as they passed by. That was the year I moved into the West End, so I can attest to how it has changed over time, and have since had to relocate outside of the dense urban core. Sim brought forth many proposals such as the elimination of single-use cup fees, which was a ridiculous bylaw to start—a program that squeezes taxpayers and ultimately does nothing beneficial for society. Sim said there will be a forthcoming review on building height restrictions, and his party ABC would look into making adjustments to both view cone and shadowing considerations:
"Vancouver doesn't have a shadow crisis, Vancouver doesn't have a view cone crisis, Vancouver has a housing crisis. At the end of the day, these are complex issues. If you rank all of these items, I don’t see too many people complaining about how the view is a crisis, or that a shadow during a one-hour period in three days of a year is a significant issue that can be labelled a crisis. But every single day, people bring up they can’t find housing.”
I'm starting to like this new Mayor more by the day.
Real Estate Tech Implosion and eXplosion
The tech meltdown carries on—Properly is now discontinuing its sales assurance service, hopefully bringing an end to its incessant bus stop marketing campaign. The service allowed sellers to unlock equity in their homes so they could buy before selling, enabling owners to alleviate the hassle typically associated with living in a home you're trying to sell. Now it's become another home search portal with independent contractors to service the leads, and not much to differentiate itself. It's a gamble to apply an unsustainable business model to an industry as traditional as real estate. It holds true that sometimes a reasonable amount of friction is necessary since it's a people business. Any hope of clicking a button and transporting to a new home is quickly becoming an illusion no amount of capital can change.
Unprecedented volatility in Canada's housing market has had a ripple effect on over-capitalized tech companies, as layoffs continue in spades. This is being seen across the entire real estate industry, as they race to cut costs. Cloud-based brokerages like eXp Realty have an advantage with efficient business models and low operating expenses. Compared to its peers, eXp agents service a disproportionately high number of transactions. The market downturn is causing everyone to re-evaluate and cut expenses in order to maintain, profit, or survive. Those with the discipline, foresight, and vision to prepare for the future are the ones that will weather the storm and come out the other side in a stronger position.
Rentals.ca January 2023 Rent Report
Rentals.ca released its monthly national rent rankings for January 2023. The annual rate of rent inflation in Canada remained in double digits for the eighth consecutive month in December. The average listed rent for all property types increased 12.2% year over year to reach $2,005, an increase of $217 from the December 2021 average of $1,788. On a month-over-month basis, average rents decreased by 1.0%, which is a typical seasonal occurrence. This is the second straight month the average monthly rent has exceeded $2,000.
BC increases strata CRF contributions to address insurance costs
- Changes the minimum amount developers or strata owners must contribute to their Contingency Reserve Fund (CRF).
- Effective November 1st, 2023, the minimum CRF contribution per year will be 10%, up from 5%.
- Only a very small number of roughly 34,000 strata corporations will be affected.
- Developers will also be required to include a CRF contribution to a new building's interim budget that is equal to at least 10% of the building’s operating expenses.
- Effective April 1, 2023, strata corporations must also include a summary of their insurance coverage in their Form B information certificate.