"The Time Has Come" But Will Imminent Rate Cuts Be Enough To Stave Off A Recession?

The Vancouver Life Real Estate Podcast

As inflation reaches its lowest level in over three years, the Bank of Canada's (BOC) rate cut predictions are becoming increasingly aggressive. While this might be a relief for mortgage holders, it signals significant economic distress. The BOC may need to cut rates rapidly to prevent a potential global financial crisis (GFC)-level event, but the question remains: will these cuts come fast enough to stabilize the economy?
This economic uncertainty is having profound effects on the Vancouver real estate market. August data shows falling prices, a trend that has continued for three consecutive months. With the five-year bond yield dropping to a 17-month low, and fixed mortgage rates expected to decline further, the affordability of Vancouver homes remains a challenge, though slightly more attainable. This is particularly relevant as the fall market approaches with high inventory levels, potentially prompting some buyers to enter the market, sensing a brighter housing landscape than in the past two years.
Mortgage holders approaching renewal in the next 24 months might find relief as rates are likely to be lower than when the overnight rate peaked at 5%. The so-called "renewal cliff" may not be as daunting as once feared. Since June 2023, approximately one million mortgages have been obtained or renewed, and many of these could now be renewed at lower rates, a trend that will likely continue as rate cuts are anticipated in the coming months.
However, the broader economic outlook remains troubling. Building permits are plummeting, with significant drops in single-family and multi-family permits across Canada, particularly in Ontario and British Columbia. This decline could lead to future housing shortages if sustained, as new home sales have already hit record lows, particularly in Toronto, where sales are 70% below the 10-year average.
The mortgage market is also showing signs of strain, with a 15% year-over-year drop in originations in June, though it's too early to determine if this is a trend. The growth rate of new mortgages remains consistent but below the growth in household income, which may keep regulatory bodies like OSFI satisfied. Fixed-rate mortgages remain popular, though variable rates are starting to see an uptick as future rate cuts loom.
Consumer sentiment is low, with the Consumer Confidence Index lingering in the 60s, a level typically seen before a recession. Rising insolvencies, both consumer and business, coupled with declining consumer spending, add to the financial uncertainty many are feeling.
The rapid population growth driven by immigration is also a contentious issue. The government's recent actions to slow this growth, particularly by restricting low-wage temporary foreign workers (TFWs) and reducing permanent resident targets, reflect the strain on housing, jobs, and public services caused by this influx. This policy shift comes after a period of extreme measures, such as massive overnight rate hikes and a quadrupling of immigration rates, which have contributed to the current economic challenges.
Finally, rising building costs, exacerbated by new import tariffs on steel from China, further complicate the housing affordability issue. These tariffs, set to take effect in October, will likely push home prices higher, despite government rhetoric about making housing more affordable.
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