They say good news comes in threes. First, Ottawa announced a bombshell loosening of mortgage insurance rules. Second, inflation stunned economists by undershooting the two per cent target. Third, the United States Federal Reserve threw a party for the markets with a jumbo rate cut.
All of the above went down in the short span of 75 hours.
Here’s a quick peek at how this trifecta could ignite Canada’s real estate market.
Mortgage insurance easing
Out of nowhere, the government decided that Canada’s default insurance market needed stimulation. Starting December 15, for those seeking insured mortgages, the government will allow:
A 50% increase in the maximum allowable home value (i.e., $1.5 million instead of the $1 million it’s been stuck at since 2012)
30-year amortizations for buyers of new builds
30-year amortizations for all first-time buyers
The first measure corrects the fact that value limits on insured homes haven’t kept up with the 76 per cent surge in home values since the rule was instituted.
The second measure creates a more liquid pool of buyers for new homes, incentivizing the construction Canada desperately needs.
The third change levels the playing field for first-time buyers who don’t have down payment assistance from their families.
Surprise below-target inflation
For months on end, the Bank of Canada has predicted that inflation would reach the two per cent target in late 2025. But on Tuesday, inflation unexpectedly slowed to just 1.95 per cent. That’s more than three quarters ahead of schedule.
Suddenly, the Bank of Canada has more leeway to cut rates without fear of re-invigorating inflation. And that’s precisely what it’ll do, with markets pricing in 200 basis points of rate cuts within 24 months, according to forward rate data from CanDeal DNA.
Such a drop would drastically slash payments, increasing the appeal of home buying relative to renting. It would also trim borrower’s debt-to-income ratios, making mortgage qualifying significantly easier. The resulting additional demand could mop up much of the inventory that’s piled up since 2022.
The U.S. Fed’s mega rate cut
Nine out of 10 economists expected the U.S. Federal Reserve to trim rates just 25 bps on Wednesday. Despite the U.S. economy being in “good shape” the central bank instead decided on a supersized 50 bps cut. A 50-basis-pointer theoretically lets the Bank of Canada cut more as well, since it doesn’t have to worry about a widening U.S.-Canada rate differential tanking our currency.
Real estate stimulus
This week’s trio of bullish mortgage events should give real estate a shot in the arm by the first quarter or before. As with all policy loosening, though, some buyers will try to jump the gun and beat the crowd.
Adding to demand is slowly improving affordability. Real estate has been correcting sideways for two years. Lower prices and rising incomes have been quietly working magic behind the scenes. For instance, the typical home is now just 4.2 times gross income for dual-income households earning average weekly wages. That’s down from a nosebleed 5.9 in February 2022.
All GREAT News for Buyers & Sellers. FINALLY!