Bank of Canada October Policy Interest Rate 0.5% Increase

Hi everyone, I’m James Garbutt. And I’m Denny Dumas. And this is the Garbutt Dumas Real Estate Podcast.

Denny: Jamie, big new news today. October 26, 2022. Rate hike number six. We have, bank of Canada increased the overnight rate another 0.5% that takes the overnight rate to 3.75% which means prime will follow in the next couple days up to 5.95%  This is the highest we’ve seen since 2008. 

James: Yeah, it’s hard to believe, what is it? Eight months ago we’re at 2.453. 3  and a half percent movement and eight months. I remember February feeling like the craziest market I’ve ever seen after years of like buildup leading to February because last year was pretty wild too. I, thismarket shift, this, this up clearly driven by rate hikes but it was I did not expect this but we have been in these weeds before. I mean, we’ve seen a prime at 5.95 before. I just, we just haven’t seen prime go that high at these real estate prices. So that is the interesting question is how, what, what impact will this have, what are we going to expect to see in the next few months? What do you think is going to happen Denny?

Denny: It’s tough to say because I mean, the natural reaction, I think by consumers, by media, by Realtors, is we’re in for another run of decline real estate prices and when the Bank of Canada is talking about another rate hike Karl – do you mind looking at their next meeting date? I think it’s early December I think it is but if there’s one more by the end of the year, that means typically when we see low inventory and activity build up in January or February we might have a pretty slow start to the 2023 season. We may start seeing from our personal business, we haven’t really seen the panicked sellers yet. We haven’t really seen the stress sellers yet as their fixed variable rates get triggered. But we may start seeing that come early 2023. So when people are stressed selling, that is often lower prices that is often fire sailing, and we haven’t necessarily seen that yet. It’s been quite interesting to watch the September -October markets. And they’ve been much more active than May, June, July, August. So it was, it was quite interesting to see consumers kind of just get comfortable with higher rates in the last couple of months. And most single family homes that were priced correctly in the Tri Cities, in New West, in East Vancouver, in North Vancouver were selling in a week. Most condos and townhomes that are priced correctly that maybe don’t have super big negatives like facing a busy street or facing the alley with a dumpster. Those are selling in a week too. I mean, the majority of our listings in the last two months have sold in less than seven days. And this rate hike plus potentially one more, that could slow down quite a bit. 

James: Yeah, absolutely. I mean, there’s still people that want to move. There are people that aren’t stretching themselves in their mortgages that can afford to move in this environment but they’re with high interest rates. Like first time buyers for example. There’s a lot of people that are stretching themselves to buy a place and I think that that market is going to subside. Who knows what’s gonna happen in the presale market because there’s more speculation there. But just to give a little background on this, where we are like we’re a prime at 5.95 and I believe my home mortgage is somewhere around prime minus point eight  five. So my interest payment is 5.1%. And when you know we locked it in it was probably in the threes. And there would have been a time if I had that same rate it would have been in the ones. 

So a lot has changed. And my thought is that, you know, I look back at a few other instances in recent history when, when we’ve been through this before and the question is how long is this plateau going to be? How long are we going to see prime around the 6% mark because every, the anticipation is going to be there for a few months or maybe half a year, a full year beyond but if it gets to a year plus that’s when I think we’re gonna see more distressed sales. You know, we haven’t like you said Denny, we haven’t seen the foreclosure rush. We haven’t seen the defaults. What happens when rates increase this much is a lot of buyers, a lot of homeowners that committed to a variable rates are now at the point where their payments that they committed to might be, instead of paying interest in principle, it might be interest only and when the when, when it gets when a payment gets the point where it doesn’t cover the interest. In theory, if you have a five year term mortgage at the end of that term, you’re gonna have a higher balance. And that’s where banks will trigger you to either up your payments or pay it down. There’s going to be people that are in a position that they can’t do that and that’s,  I think it’s going to take a few months to show its colors. I think we might see it start seeing it in the new year. Usually real estate lags a bit. And right now, you know you mentioned where, you mentioned that the fall has been busier relative but I think it’s I think the accurate way to say the fall has been busier than expected based on how the summer was. Statistically, the fall is still down. We’re still behind the 10 year average. You know in terms of numbers of sales last month, I think was 35% lower in terms of sales volume than the 10 year average. And we’ve been on that path for the last few months. 

My personal thought is there’s still a lot of people that want to move and every month we’re 35% down in volume that means a future month is going to be 35% up in volume but that will that, that probably won’t happen until rates lower. So, I guess,  just to give a little background on this: COVID hit in was around March 2020. And prior to COVID hitting Prime was at 3.45% for a while. COVID hit they did, oh wait, sorry, 3.95% Prime was at 3.95% then COVID hit and they did an abrupt, reduce they reduced Prime by one and a half percent to 245 and then 245 stuck around for two years. It was around from March till February and, and then in February of this year. In my opinion, the craziest market that has ever existed was the last month where it was around that point and since February it just it’s increased now three and a half percent in what I believe is eight months if my math is right. So now we’re at 5.95% And we have been here before.

I guess kind of going back I first got licensed myself in February 2008. And I had the, the joy of getting licensed right at the peak before the crash of 2008. So you know I like looking at that because I do recall Prime being around this mark. So I look, I dug into that yesterday. And I thought it was quite interesting, but it was a little bit of a different pattern than what we’re seeing today. 

So for those that don’t know, our Vancouver real estate market crashed pretty good from let’s call it August 2008 to January 2009. So during that window, I’m going to say prices came off 20% in some areas more, in some areas maybe less the only areas that were maybe less within like an East Van home but they were still off 15% and slow. I remember there was a time where it’s easy to buy and East Van home, an East Van property. But East Van was arguably one of the most bulletproof markets back then. 

So in that window the market Vancouver real estate market crashed July 08 to January 09. The big difference there is that the prime interest rate peaked in July oh seven so that’s when it hit the hit the peak is till I was seven and that peak back then was 6.25. So we’re at 5.95 today. They increase the last few rate hikes were .75% This is .5% If that’s a signal, and they’re not influenced by what other, well they are influenced by the world but if that’s a signal to me that maybe mean that the next hike might be .5% or less and or they might be starting to plateau get to that, maybe it peaks at 6.25% like it did last time. But my guess is that the next announcement’s not going to be zero and it’s probably going to be a smaller hike. I am not an expert so don’t hold me to that. 

But in 2007, the primary peaked at 6.25%. It stayed there from July 2007 to November 2007. And in our market was still going strong in 2007. And the headlines in the media back then was: “Vancouver’s in a bubble,. Vancouver is n this different world” because the US market was crashing, a lot of markets around the world were crashing, the bank who was holding its own. All it was doing was just delaying its, its effect and it wasn’t as harsh as some areas because there was definitely far worse crashes. The US banking system was collapsing, Canadian banks survived. So it there was a lot of different, lot of different stuff going on. But up here 5.75% Prime rate held in it for both two year period back then. And that’s my concern for this one. I think we’re in a world where they do the adjustments quicker now or I hope we are where the where it’s gonna go up fast and come down fast. But in 2007, around that time, Prime was above 5.75% for two years. And I think if we saw that today, that would, that would have a pretty big impact on the market. I think the longer the Prime stays high the more the distress sales will see the more the fear, the more the media headlines will hit. And that snowball effect could mean that next year is a down market. It could mean that right now the prices are higher than we’ll see this time next year.

Hard to predict right now. So I’m gonna go on, I’m gonna keep my tangent going Denny if that’s okay. One thing to highlight is one thing I was really curious about is how fast Prime comes down, you know when it goes up because in my opinion, we are getting these rates in November. It’s the off season now so if Prime hiked up to .78% in say December arguably we could, it may have minimal impact on the real estate market until the Spring because there’s not many transactions that go on in the offseason. So, the thing that can fight against the rising rate hikes is the listing supply and the lack of them. So if the supply goes down, and the demand is still there, it could hold prices and we’ve seen that in the past. But yeah, my, my thought is if it holds for a while, we’re going to start seeing its colors and next Spring could be the start of it. Or next Spring could be the similar example that we saw in 2008, where the market held for a year after the Prime beat and then started coming up and next Spring could have the hype of a Spring market, enough transaction to hold our prices. And then if it doesn’t start coming off in Spring, I think it’s probably next Summer that you’ll when the market naturally slows in June or July that you’ll start seeing inventory build up and prices coming off more. That’s if Prime goes up a little further and holds for say six months to 12 months.

Denny: What do you, what’s your idea of why inventory didn’t build up this summer? Because we see in May, June, July, August, sales volume declining now we’re well below the 10 year average. Why wasn’t there this big flood and why isn’t there a ton of inventory? And it seems like that was the reason for September- October being quite active is that buyers kind of came back a little bit and there wasn’t a ton of inventory. And so we saw multiple offers again. We saw products selling in the first week. 

James: I think we’re just coming off this election. I think we kind of came, we kind of realize that cities do a great job of keeping our supply tight. Everyone, everyone’s promoting more housing and affordable housing but you know, the, the actual process and the, the incentives aren’t there in a lot of cities so there’s just not enough new development. So that one factor is there’s not enough new housing hitting the market. The other thing is, we seem to be in this pattern where a detached, like you see it more in detached homeowners where they always want more than what it’s worth. So there’s a large percentage of detached homeowners that are ambitious beyond the market all the time.

 I mean, you see that definitely in Anmore say more than it is here. Where probably had one of the lowest success rates of selling listings out of any market I can think of. But part of it I think that when, when the market shoots up and it’s been such a wild market when I say February is the peak pricing and if we’re getting if we’re selling 10% off that February price, we’re really selling at the same price that we saw last October you know? So we’re not like it was, it was a short window where it shot up. I think that it’s a combo of lack of new housing. I think that there’s a lot of people that when they see a high price, they want that high price, some of the high price goes away. They wait and for it to come back or they list their place anyway and just don’t sell it. Less motivated sellers. I don’t, I do think a lot people think alike and, and there’s still a wave of people that want to move. I don’t think we saw that post COVID trend of people wanting more space and relocating fully execute itself. I think we saw a lot of that happen but the rates movement going up has kind of put that on hold for a bit. 

So I don’t, I don’t know what to expect next year. This is, this is a wild market. I, I just feel that it’s gonna get worse the longer the rates stay high because I don’t think people can afford their homes at these prices. 

James: I want to go back a little bit more because 2008 was when I first got licensed and saw it and I mean the biggest takeaways from that from a real estate market perspective was that our real estate market lagged from the Bank of Canada Prime rate movements, our real estate market lagged from what was happening in other markets say in Toronto or, or the US. And our prices really bounced back quick right after. So the in January 2009 when, when I feel it was good, it might be able to correct me statistically, but to me that was what felt like the bottom for me in the markets that I was selling in at that time. The media headlines were: “It’s gonna go down another 20%” and it went the opposite direction in 12 months. So it’s the, the negative headlines. Don’t follow the news  headlines. They’re just trying to get clickbait and attention. But back then it was just January 2009 still felt negative, still felt like the sky was falling. And that was the bottom and it came out of it quick. My hope is that, my original thought if you asked me a couple months ago I thought that that might happen next year now with the way the world’s going, it might be another year. Next year could be a weird year in real estate. I don’t know if I answered your question…?

Denny: Yeah. 

James: One other thing Denny,  I’ll just kind of go back-  so 2008 crash, the Prime peak at 6.25% The previous crash like the previous Prime peak prior that was in 2000 and this is before my time I was fresh I think I was a grade12 student at that time. But in 2000 Prime peaked that 7.5% and it stayed there for 12 months. It stayed at 7% or above for 12 months. And then it came down as, as it was coming down. It came down 3.5% in 11 months. So my thought is we’re up three and a half percent in 2001 or 2000. It took 11 months for it to get backtrack, that’s that, I could see that happening again. In most cases…and in 2008, from November 2007 to April 2009, it went down 4%. So 4% in 16 months, so three and a half percent in 11 months in 2000, 4% in 16 months in 2009. That’s how long it took for it to come down.

My guess is if we’re at 5.95 right now and if it peaks at six and a quarter or six and a half. It’s going to take at least six months for it to start coming down and I don’t think the market is going to have it, you don’t have to wait for it to get all the way down for the market to be optimistic. But it probably needs to be in the fours to start experiencing that frenzy of bidding wars and multiple offers and subject free offers again, but that’s a while. Yes.

Denny: I tend to agree. But I also think as soon as consumers see it start coming down. They will act again. The real estate market will be more active. We come back to the same problem of like supply hasn’t ballooned in the last six months since rates started coming up. So as soon as consumers have a little bit of confidence. I just feel like we’re gonna kind of be back where we are because we, because supply is not keeping up with how many people want to live in a city.

James: I think the confidence is, I agree with you. I think it’s going to really show its colors with the hot products. You know, there’s the products that are in abundance. You know, Surrey has a lot of townhouses for example in some areas that are more rare but in a lot of areas they’re just these ordinary stacked, narrow new townhomes that are, that there’s more supply than demand in a slow market. Same with like the one bedroom condo in North Surrey. But from what I’ve seen, a nice house in New Westminster that’s newer you don’t have to do a thing, turnkey, ready to move in. And I’ve seen that in the North Shore with larger new homes. Those are almost unaffected by the market and by unaffected that I see they’re not gonna get February price but they’re gonna get, they’re selling at like 5% off and to me, that tells me that they’d be a lot more expensive if the rates didn’t hike up. But we had a sale in Glenbrook, North New Westminster and I’ve, with buyers, I’ve seen a few properties and Deep Cove side and Lynn Valley side of North Vnd. And in those instances, a good house is still holding. And so I think that yeah, you don’t need like if they’re holding today, they arguably will still get a good sale price in December. But once rates start coming down a $3 million home, might turn into a $4 million home in a year or two if, if rates go from say 6% to 3% coming out of this. 

So the good products, I think like I think East Van, there’s certain areas like Yaletown, condos and East Vancouver that didn’t reap all the gains of that COVID world they didn’t go up 40% like some of the other markets, they they might be less affected because they are kind of on trend again. A large turnkey house in the North Shore where say the Vancouverite that’s having a family that has money, that that’s a, that’s a popular suburb, those might be unaffected or least impacted. But you know, when you look at Lougheed and Brentwood in Burnaby there’s a lot of towers there,  a lot of condos there. I think those areas that they might show their colors, they might be more affected by this market, because there’s just more product.

Denny: Talked a lot about people that already live here, but the estimations of immigration over the next five years are 80,000 people coming to Greater Vancouver per year for the next five years. And you, before we jumped on here you were talking about the Canadian dollar and how that’s been affected. So it’s interesting to look around the world and see what else is happening and potential immigration coming to Greater Vancouver and those people’s dollar goes a lot further currently because of where the Canadian dollar is.

James: Yes, I think I did a little math here Denny because I’m really mathematical.But I thought it was interesting because our dollar when you look at the conversion of Canadian funds to US funds a million dollar Canadian property. Property in Canada in May would have costed American or in US funds $833,000. So in May a million dollar US or a million dollar Canadian property with a $833 American and today it’d be about $725. So we’ve already, our,, I don’t have a percentage point but that’s nearly $100,000 off in seven month window. We’ve already, our prices have gone down more internationally than they have locally. So we’re talking, when we’re seeing some a lot of desirable products for say 10% off February pricing. They’re on an international level they’re 10% off plus add another 15% -ish internationally.

So we’re starting to, I guess when you look at the factors that would hold the market there’s a lack of supply. I mean, they’re not making more detached homes in Lower Mainland. So if detached homes are desirable that, that could hold prices. Outside investors. The dollar you know, I’ve seen some articles that we could anticipate a lot more Chinese buyers coming in and but any country that sees how beautiful Vancouver BC is in this COVID environment could be lured here. So internationally, we’re getting cheaper and our supply isn’t really loosening up. Those are two big things that could hold our prices. But I truly believe if our prices hold when we come out of this when the Prime rate starts getting back down to that where I think it would settle around 3% somewhere, our prices are gonna be a lot higher. So if they hold in a 6% Prime environment, they’re gonna be a lot higher when they get back down to three. Time will tell. 

What else do we got? Oh, I think we, we talked about the triggering of mortgages and how that could anticipate default rates so the things I guess what, what are you going to watch over the, I mean it’s hard to really make predictions on the market based on looking at November- December data but what are some indicators or things that you might watch over the next three to six months that will give you a clue what to say when those clients come to say “Hey, should I sell now or should I sell in January February?” What, what, what comes to mind? What are you watching to give them that advice and what are you saying?

Denny: It’s a really tricky question to answer right now because short term is very unpredictable. With potentially another rate hike in December, we could have a six month window that is very slow. That is like you said, you may sell for less in February than you would have sold for in October. It’s always a question of what’s the goal? What is the full formula look like and if you’re buying and selling at the same time, often a lot of our clients are upsizing and it is a phenomenal time to upsize right now. So you may take a little bit of a hit on that condo, but it’s going to be a net gain upsizing to a townhouse or house right now.

James: Let’s  just be really clear down markets are the best times to upsize.

Denny: Huge.

James: It may not be a fun selling experience, but the buy  is going to reward you in the long run. This is the best time to upsize that, that you’re absolutely right.

Denny: We got through it a lot right now and a lot of sellers are, are sticky on their list price when they’re selling their condo when in reality if you, especially when you get an offer on the table if it comes in 30 or $40,000 under your list price, work with it. Because the net game of saving three or $400,000 on the house makes your negative $30,000 on your condo, a lot more worth it. Because if you’re waiting a year or two to get that 750, 800 whatever you’re looking for in a condo, that house might go up another 300k and then it almost at that point is unaffordable, even if interest rates are better. 

James: Absolutely, like a fixer upper home. They’re not getting as much attention, buyers are a little more picky now. So it doesn’t even you know, when we’re saying buy up doesn’t mean they have to buy a luxury home, Buying, just getting into the detached market, there was more sales around 1.3 million for detached, well, there isn’t a lot but there’s a few sales around 1.3 million that wouldn’t have happened six months ago in New Westminster that I saw in the last 30 days that I was a little bit surprised at and, and I can see the the buyers, the mentality really goes from “Can I have this home without inspection, subject free, I’ll give you what you want” to “I wish there was a window there. I don’t like the natural light in this place.,” You know they, the little particulars start to show their colors really quick whens when the market shifts and I think a mistake could be for anyone that’s, that wants to upgrade and upsize I wouldn’t really delay it beyond Spring of next year. You know, I mean I say that without knowing your circumstance and particular circumstance but all I’m really getting at is: a down market is a good time to upsize and it can turn again quick and I don’t see this turning in the next six months.

I think we’re going to be glued to the sales wondering what’s, what their, what direction the market is going. And if I were to guess I could I would assume that February sales are going to be the same as what we’re seeing in October. I think the same for March, I, my guess is that the lag, if there is a lag with a further downturn, I think it’s probably going to start showing its colors in June onwards. And if it, rates might be coming down by them. But I don’t know, that’s, that’s the end.

Denny: Often the activity early in the year kind of predicts what way the Spring is gonna go. So if you’re, if you’re saying what are you looking for in the next few months, I think activity in January, how many listings there are if it’s really low and those listings start getting very active and there’s 20–30-40 people coming through an open house and they’re selling in a week. I think that will, think that shows that the Spring is probably going to be quite active as better homes come up through March, April, May. But if there is a little more inventory than normal in January, and those homes are not selling in a week, even the good ones I think that’s going to show that we could see prices decline as more inventory comes through this room.

James: In most markets, I typically suggest when someone asks: “Should I sell now or later  around this time?” I usually, my saying is “I have yet to see a January or February be worse than in November or December.” Right? If you’re thinking of selling in November, or December, my typical answer is “Well I’ve yet to see a January be performed worse than November or February.” So what I mean by that is typically if you’re thinking of selling November if you wait till January or February, you’re gonna get a better price. This year is the exception. I mean, I can’t say that with confidence when you anticipate more rate hikes. My, my assumption is it’s such a weird world. I’m just going to default to assume it’s the same and there’s an argument to say it will be worse if you wait to sell and you’ll get a better price today. And there’s an argument say it might be better but you can’t say that confidently in either scenario. So I think the, just the tidbits of this podcast episode, the takeaway is, is past times we’ve seen the Prime go this high and 2007. It stayed up there for above 5.75% for two years. The peak, how long the Prime rate stays high will dictate the market if it stays high for a longer time. I think we both anticipate more defaults to happen and more market negativity and a potentially bad 2023 market. But right now it’s a good time to upsize. In weird, uncertain markets it’s good to upsize and I see the traffic coming through open houses. I see that there’s people that want to move and I also see that there’s people nervous about making that move. So let’s see what next year brings but we’re at 5.95% now.

Denny: A really good indicator too early in the year or I don’t think this will necessarily happen until we start seeing rates decline. But when you see land value properties sell quickly. That usually is a bit of a trigger that the following months are going to be quite active. When you see builders coming through land right now, in a slower market where rates have increased quite a bit. Builders are coming through and they’re saying what’s the bottom number? They don’t even walk in the door. They knock on the door at an open house and they say: “What’s the, what’s the bottom number? What’s the realistic number the seller is gonna take?” and you’re like: “Would you like to see the house sir?” But when that, when those questions start happening, you know that like the land value, the busier streets those are, those are quite slow and when the builders start writing offers again, it seems like that kind of propels single family.

James: And then we’re talking more of like the suburb builder. They tend to, they tend to always have projects on the go and always be maxing out where they can, you know, buy and work on and usually when they’re offering it means that they’ve sold off some inventory and they have money again. And I, I couldn’t see that. You know, a new home, a well built new home is still doing okay. I don’t think people want to pay that GST in this market but, but they’re, they’re not doing too bad. I don’t know if they’re doing well enough for profit. When you look at the cost of land and the cost of the construction costs plus GST all those fees included. But yeah, I think you’re right builders buying land is a good indicator of where the market will go. There’s a lot. Exchange rates and bank rates. I don’t know. Let’s wait and watch and see Denny. 

Denny: I know. We should do another little update here maybe, what is it? The end of October, maybe early December, just to see how the last, the next 30 days go. Because like I said, a lot of product in the suburbs of Greater Vancouver, not so much past the river, Fraser Valley has been quite slow. But September-October in the Tri Cities in New West, East Van, have been really active. So prices haven’t necessarily climbed or gotten back to peak pricing but the activity is encouraging. Who knows maybe that’s another half percent means November-December quite slow.

James: I mean, I think the cost of building a home isn’t getting much cheaper.  Wages and materials aren’t getting much cheaper. I, you know, I think I saw an East Vancouver half duplex sell for $1.78 that would have got $1.98 in February,  $200,000 off. The peak of the luckiest price it could have gotten for a very short period of time. I don’t think they’re gonna get those dupes. That’s, that’s like a 1600 square foot, brand new, front-back sort of duplex. I don’t think those are gonna get much cheaper, like they can’t. Builders will be taking big hits at one six. I think there’s a certain price that people will just stay and wait. They’re not making more houses the longer you hold. If you don’t have a real good reason to sell you probably shouldn’t sell but a real good reason to sell is upgrading or moving. 

I think those markets that we don’t work in further out in the Valley, Sunshine Coast, Gulf Islands, recreation property.I think they’re gonna get hit pretty good.

Denny: Just yeah, I mean I don’t know if prices are necessarily going to decline more significantly than they are in Greater Vancouver. I just think there’ll be a slow, slow activity for a greater period of time then, then outside of Vancouver.

James: The island Realtors and the Sunshine Coast Realtors were shocked by the last markets. So they’re going to go back to what they were used to before. I think that’s a wrap. It, let’s, let’s come back to this topic and you know, we’re looking at sales that happened in October or September right now. The lag, real estate lags behind you know real time data.

I think, I’m really curious to see what the sales are gonna be like November-December. That’s it Karl. Thanks for listening.