When will they start cutting interest rates?
Is it going to be next year? In 2025?
Right now, markets anticipate that the Fed will lower its key rates by the end of 2024.
But while every expert is fixated on the Fed, I’m reminded again that you need to look elsewhere to understand what’s coming according to the 18.6-year real estate cycle.
Right now, you need to be looking at Canada.
Canada’s Liberal Government Kickstarted Monetary Easing
Higher interest rates lead to “tighter” financial conditions. Put simply, credit gets more expensive, so there’s less demand for it.
“Easy” conditions mean just that: getting access to funds is easier.
Canada’s government has just announced a massive move towards monetary easing.
It proposes to remove one hoop that Canadians needed to jump through to renew their mortgages.
Before, if you wanted to renew your mortgage and you decided to shop around for better interest rates, you would need to pass the “stress test.”
The idea here is that you have to be able to afford your mortgage at a higher interest rate.
For example, if you’re about to renew your mortgage at 4%, you need to have enough income to pay a 6% mortgage. Those extra two percentage points are a “cushion” to make sure that if interest rates go up, you can continue paying off your debt.
But not anymore.
And you can understand why. Homeowners who have been renewing their loans at higher interest rates needed to pass a stress test at a level that was too high.
Right now, a five-year variable rate in British Columbia is about 5.9%. Which means that homeowners would need to be able to handle a 7.9% interest rate.
That’s too “tight.” With inflation still high and incomes stagnating, many just can’t afford to renew.
Government to the “Rescue”
The Canadian government understands how important the nation’s housing market is. And how crazy expensive new mortgages are.
So they did what most governments are best at: try to win votes.
“Our goal is to help Canadians through an incredibly challenging time by making sure Canadians have the support they need to afford their homes when renewing at a time of higher interest rates,” [Canada’s Finance Minister Chrystia] Freeland said in the House of Commons Tuesday.
One of the proposals would see homeowners with an insured mortgage up for renewal not have to requalify at the minimum qualifying rate – colloquially called the stress test – if they’re switching lenders at the end of their term.
If mortgages are easier to get, that’s monetary easing.
And it will push the 18.6-year real estate cycle forward.
Just as I expected, financial conditions are about to become less tight, which will push asset prices, from homes to stocks, upward.
With elections in the States coming, I won’t be surprised to see the government “address” inflation and home affordability, too.
Maybe in a different way, but to the same end. Easier credit, more liquidity in the system, higher home prices… and the cycle continues.
Editor, Cycles Trading with Phil Anderson
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