Real Estate Shake-Up! Inflation Drops, Rate Cuts, & New Policies Explained
This week has been monumental for Vancouver's real estate market, with several key factors influencing housing and the broader economic landscape. Inflation has officially hit 2%, marking a significant milestone for the Bank of Canada (BOC) as it reaches its target for the first time in nearly four years. While the broader inflation rate stands at 2%, if the mortgage interest component is excluded, inflation would be just 0.9%, signaling a rapid decline in core inflation metrics. However, rental inflation remains elevated at 8.6%, though this is expected to decrease in the coming months as rent prices have been falling for about a year, potentially pushing inflation even lower. As a result, markets are now pricing in rate cuts at every BOC meeting until at least the summer of 2025, with an estimated 1.75 basis points reduction by July 2025. The five-year bond, crucial for mortgage rates, is now trending downward at 2.7%, the lowest in over two years.
On Wednesday, the U.S. Federal Reserve made a notable move by cutting its benchmark interest rate by half a percentage point, the first such reduction in over four years. This marks a shift from controlling inflation to supporting a slowing labor market. The Fed's decision to lower rates from 5.3% to 4.8% signals a major adjustment as inflation in the U.S. has fallen from a peak of 9.1% in mid-2022 to 2.5% in August, aligning closely with the Fed’s 2% target. Policymakers have indicated further cuts this year, with more anticipated in 2025 and 2026.
Adding to the shake-up, the federal government of Canada announced that it will increase the price cap for insured mortgages from $1 million to $1.5 million, a surprise to both the industry and policymakers. While many in the real estate sector championed the change, it's important to examine who this adjustment really benefits. Although extending the amortization period to 30 years from 25 years helps reduce monthly payments by about 9%, it also increases the long-term interest paid by homebuyers, with an additional $80,000 paid over the life of a mortgage.
More critically, this move likely pushes the price band of homes in this range up by 9%, doing little to address affordability. Historically, the CMHC was designed to help veterans and lower-income buyers, but this increase will likely push prices higher, benefiting banks and investors more than first-time homebuyers. With the minimum down payment on a $1.5 million home being $125,000, this policy change seems to cater more to affluent buyers, as only 15% of Canadian households could qualify for such a mortgage. Despite these hurdles, this adjustment will create more demand in the $1 million to $1.5 million price band, potentially driving prices higher, which contradicts the notion of increasing affordability.
Historically, the CMHC was designed to help veterans and lower-income buyers, but this increase will likely push prices higher, benefiting banks and investors more than first-time homebuyers. With the minimum down payment on a $1.5 million home being $125,000, this policy change seems to cater more to affluent buyers, as only 15% of Canadian households could qualify for such a mortgage. Despite these hurdles, this adjustment will create more demand in the $1 million to $1.5 million price band, potentially driving prices higher, which contradicts the notion of increasing affordability.
The escalating development cost charges (DCCs) are another major issue facing the housing market. Developers in Vancouver have expressed frustration with the rising costs of city-imposed fees, which have increased by as much as 68% since 2020. Several prominent developers, including Wesgroup, Polygon, Anthem, and Strand, have pushed back against these fees, arguing that they are making new housing projects financially unviable. In Vancouver alone, there are 14,600 approved units that have not yet started construction, while Surrey has 34,000 units in the same situation. The viability of these projects is in question, especially with DCC increases making it harder for developers to proceed. The rising costs have contributed to a slowdown in pre-sales and new construction projects, with many developments struggling to meet financing requirements.
This week’s developments reflect the complex and often contradictory forces shaping the Vancouver real estate market. Inflation is cooling, but rate cuts are on the horizon, and new policies, like the increase in the insured mortgage cap, seem to be helping banks more than first-time homebuyers. Housing starts are down, and developers are grappling with higher fees, all while household debt continues to climb. The fall real estate market in Vancouver appears to be on shaky ground, and without significant changes to housing policy or economic conditions, the outlook remains uncertain.
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