What Is An Exclusive Listing?
On Wednesday, October 25th, the Bank of Canada announced its decision to hold the overnight rate steady at 5% while continuing its policy of quantitative tightening. Globally, economic growth is moderating, with projections at 2.9% for this year, impacted by factors such as the war in Israel and Gaza and changing economic dynamics in the US and China. Domestically, signs show that previous interest rate hikes temper economic activity, with Canada’s GDP growth anticipated at 1.2% this year. Despite fluctuations in the CPI inflation rate, the Bank projects it to settle at around 2% by mid-2025. The Bank stands firm in its objective of achieving price stability for Canadians, indicating readiness to adjust the policy rate further if necessary.
We sat down with Jason Friesen, a seasoned financial professional who has managed over $1 billion in mortgage deals and is a partner with a reputable firm, Outline Financial. He is known for his customer-centric approach, emphasizing agility, trust, and top-notch service, Jason truly offers an unparalleled broker experience. We know that our clients appreciate Jason and his team, and we at Fox Marin work with him personally, too! Jason’s expertise, combined with Outline’s ethos, ensures clients access to the best financial products tailored to their housing needs – we could not ask for a better expert to break down the Bank of Canada’s announcement to hold rate.
Thankfully, they paused. The harm that would’ve happened to the financial markets, to the real estate market, to everything would’ve put many more people under much more duress. We need to see these rates work their way through the system as it’s doing, and it’s seemingly starting to take hold. It’s just so interesting to see the importance right now of all of these announcements, and everybody’s stopping just watching to see what the bank is doing, and today was a great example of that.
I wasn’t surprised after we saw inflation numbers for the month of September come in lower than expected. It paved the way, really, at the end of the day, for the Bank of Canada to sit on the sidelines, and they did exactly what most people were expecting would happen.
The bank, in its verbiage, is leaving the door open to further hikes. In the month of November, we’ll have the October inflation numbers, we’ll have job reports, and then we’ll have the third quarter GDP, and then also on December 1st, we’ll have November’s job report. All these critical pieces of information will be what the Bank of Canada will be reviewing before their next meeting on December 6th, which hopefully is not a hike. If you look at what all the big banks are saying, it will be data-driven. All the big banks economists say they’re done raising interest rates. Again, anything can happen. We could see inflation numbers spike, but at this point, the expectation is that we’re likely to see the Bank of Canada on the sidelines. We’ll see what happens however, the likely scenario is that there will be no further hikes, and interest rates will remain at their current level.
On average, borrowers are qualifying for about 30% less than they were in 2021. That’s a significant amount of purchasing power that’s been eroded for most borrowers. But once we see a signal that they’re done raising interest rates, that’s when you’ll start to see a shift You’ll start to see bond yields begin to come down at some point in time. So you’ll likely see fixed rates come down in anticipation of the overnight lending rate coming down, whether in Q2, Q3 or Q4 of next year. And once we see fixed rates come down, that’s when you’ll start to see more activity.
We witnessed in March and April when we had the SVB bank collapse; the conversation shifted and projected a rate cut before the end of this year. I thought that was ambitious and wouldn’t happen, but the market started to price the possibility of that happening, and we witnessed fixed rates fall below 5%. In some cases, we had clients that were getting 4.5%, March and April were busy in real estate and started to pick up activity again. So once we see fixed rates with a five or a four in front of them and not a six, it’ll start to change the psyche of many borrowers. But it’s a very touch-and-go situation right now.
The market is pricing in that it will be a slower process to see the overnight lending rate start to come down. But if we track the big six banks, it’sproejected that we could be between a half to one and a half percent lower by the end of 2024, starting either in Q2 or Q3. Who knows if that happens, but that is the expectation based on where the big six banks in Canada are forecasting.
There is a section of the market that is nervous, and I’m talking with a lot of past clients and current clients as well. If you can hang on and not be distressed, not selling is the key right now. Can you make it to the end of next year? If so, hang on, and rates will come down. Buyers are looking at it as an opportunity to get into a market that has less competition and where it’s more balanced. We all know how the last several years have gone. It’s been a seller’s market. So, for borrowers, our buyers that are looking to get into the market have less competition, and they also can shop around and make a decision versus at a house and having to decide if this is their forever home within three hours of looking at it.
A lot of buyers are looking at this as an opportunity to get in with less competition, even at higher interest rates. I think the conversation is that most are definitely looking to take advantage of either a variable rate or a shorter-term fix so that they can buy today at a more manageable price but then put themselves in a better situation in the near term either by going short-term fixed or going variable and watching rates go down so that they can reduce their carrying costs in the near future. Of course, there is a risk with that that rates don’t go down.
If you have a property, you might be under duress. However, if you can keep treading water because this will pass, I basically using the analogy that the market right now is passing a huge kidney stone. When we get to the other side of this, supply is coming down right now significantly, and the pipeline is going to be choked, demand is going to come back with a vengeance with all these people who are sitting on the sidelines. So hang on if you can because brighter days are coming. It’s hard to know when, and sometimes, in the darkest days, it’s hard to think of what the other side will look like, but it’s there.
Those are the two best positions to be in right now. One of the considerations always was to buy first and sell after. I have no idea how you, as realtors, do your jobs because the market is so in flux right now a house could sell in two days, and another one could sit for a month. So, the conversation has shifted. “Do I buy first, or do I sell first?” And if you don’t have the means and the worst-case scenario mapped out that you’re comfortable with, you’ve got to sell first, which is the reality of it. Always be sure to know what your cash position is and know the worst case. If necessary, stick yourself in an Airbnb versus being stuck with two houses with interest rates as high as the carrying costs on two places; it’s through the roof, something that can bankrupt you. I think the conversation has shifted quite a bit from previous years where you absolutely would be crazy to sell before buying because you might be looking for a year before you find a place that, even if you found one you like with the odds of being successful because there was so much competition.
The conversations we’re having are a lot lengthier and a lot more about strategy in coping with the uncertainty, the uncertainty that everybody’s facing right now. It’s always best to plan for worst-case hope. In most instances, it never gets to that, but at least you’re moving forward while protecting your downside That’s what it comes down to: you’re moving forward, understanding that your worst case is a possible reality, and if you’re going to move forward, you’re okay with that being the potential outcome.
The overnight lending rate, I assume, is what you’re talking about, from five to 2.5. We had Benjamin Tall as a guest speaker at an event who said the same thing. CIBC is expecting by mid to end of 2025, the overnight rate will be 2 to 3% lower than it is today. Realistically, the Toronto real estate market will operate well in a 3 or 4% interest rate environment or even low 5’s. It’s just the mid 6’s, which, when you add 2% from a stress test rate perspective, and you’re qualifying based on 8.5%+, it’s putting a lot of people on the sidelines.
That brings me to a point, which is the office of the superintendent of financial institutions. At the start of the year, there was a lot of concern that they were talking about tweaking mortgage guidelines and not for the better, making it a lot harder and more restrictive for people to qualify.
The public consultation industry ended in April. We heard nothing; no one had any idea what was going on. And then, on October 16th, they released their findings. None of the changes they were proposing will go through. We will limit the qualifying ratios, GDS and TDS, which are the two main qualifying ratios for mortgages and have stringent guidelines. So they’ve thrown that out the window. They’re still allowing banks to do it at their discretion. And then any review of the stress test making it more restrictive also looks off the table. OSFI meets once a year, so they’ll revisit the stress test rate to see if it needs to be adjusted, but it doesn’t look like it will be adjusted for higher. They have just set an agenda and review process, but I expect nothing to make it more restrictive. So it’s good that we didn’t see that on top of these high interest rates, making the financing even more restrictive, it could have put the market in a bad place and put a lot of people in a challenging spot. So I’m glad that they use common sense there.
Variable rate is starting to look more and more attractive, that’s for sure. But again, it is not a one-size-fits-all approach. If you have a lot less risk tolerance, the fixed rate gives you some certainty that the variable rate does. And even if it comes at a higher cost in the short term, for some people, the only way they can sleep at night is knowing what they’re up against every month.
The banks are much tighter than they were over a few years. In part, the banks really staffed up over the course of the last couple of years, so they have a large number of people working in underwriting, and they are not seeing as many deals coming through. So they can do more due diligence. You’re seeing that if you’re a good borrower, you’re still getting approved, but there are a million extra steps you do have to take, even if it’s a cookie-cutter deal. That cookie-cutter deal doesn’t exist anymore because everything takes twice as long. Someone with bruised credit or who doesn’t show a lot of income that used to get done at a bank is now being forced to go to alternative or B lenders.
Some mortgages with B lenders are now forced to go private because they’ve tightened up. So, everyone’s tightened up their policy. Even private lenders are less willing to go to higher loan values. Typically, in normal times, you could get 80% loan to value, so someone would’ve put 20% down if they’re going private. A lot of private lenders don’t want to go above 65% loan to value, so they want to make sure that there’s at least 35% equity in a property. So we’re seeing changes like that. Everyone is more risk-averse. And if you take a risk, you want to be rewarded. Why would you give someone a mortgage at 7% or 8% and assume a bunch of risk? It’s got to be worth it for them. In this environment, we are seeing 10% plus for private loans. In the private lending space, there are a lot of people who are making a lot of money because there are a lot of people who are in a bad space, but it’s not without risk that those private lenders are assuming, that’s for sure.
No. The default rates are quite low. We were looking at a report that they’re still at all-time low levels. We’re not seeing anything crazy happening. That’s due to the willingness of banks to work with borrowers. So, if you’re in a tough financial spot, contact your bank, and they’ll work something out with you. They don’t want borrowers to go into default. I’ve never seen banks as willing as they are now to work with people even more than they did the deferrals during Covid., but now they’re looking at things on a case-by-case basis and really helping people put a plan in place to keep them in their homes. This is also coupled with the fact that a lot of borrowers have variable rates that are with fixed-rate payments. The consideration that’s also protected a lot of the variable rate borrowers, so they’re not seeing a huge increase in payments.
A very small amount of real estate investors who were not cut out to be real estate investors, to begin with, have had to sell, or they found themselves in a situation where something else in their lives happened where they needed the cash. I’ve seen that situation happen where borrowers are feeling the pinch. It could be due to a loss of income or something that happened on their side where they’ve sold an investment property because there’s a lot of equity in the property that gives them some breathing room. Again, the conversation is to try to hang on because, to your point, I think if we’re looking at this two years from now, we’re going to be in a much different marker from a housing perspective, with even more people looking to rent with fewer properties coming online just because of the low number of new construction
If you can hang on, just get to the other side where rates start to come down, weather the storm. You’re going to put yourself in a better spot. Looking back on this five years from now, if you pulled the chute three months prior and then rates do signal that they’re going down, you’re going to have a major regret because I do see prices rising in the city. I’m bullish on real estate, that’s for sure. Long-term, medium to long-term, regardless of what happens over the next six months, I’m still very bullish on real estate, especially in the city and in the GTA.
We’re going to see the amount of inventory creep up. It will, as a result, shift to more of a buyer’s market. I think we’re going to see some downward price pressure on pricing in the short term, and then I think by the midway point of next year, t maybe the Bank of Canada has moved by then, or they’ve given a good signal that they’re done raising rates and shift the conversation to when they’ll start cutting them. And then, from there, we’ll start to see prices take off. If you look over the last ten years, the compounded growth rate, at least on a detached home, is like what, 7.9%? So, when looking 2, 3, or 4 years out, you will look at higher prices from a real estate perspective than today. You’re going to estate prices; the combination of inventory and a lot of demand will likely continue to keep upward pressure on prices for years to come.
Do what you got to do to hang on, and don’t sell under just because you’re distressed right now; try to figure out a solution. Work with your bank; can you refinance? Is there something you can do to help yourself get over the hump? It may mean that you need to sell, but not right now if avoidable. You should wait before you sell. If you can hang on a year, look at what the market looks like at that point in time versus selling in a time that’s in flux, that’s for sure.
Wrapping up our discussion on the Bank of Canada’s decision to maintain the overnight rate at 5%, the global and domestic economic landscape presents many challenges and opportunities.
With projections highlighting a moderating global economy and a tempered Canadian economic activity, the insights of seasoned financial professionals like Jason Friesen become imperative. His vast experience and keen understanding of the intricate dynamics of the financial market offer a valuable compass as we navigate these uncertain times.
The many questions discussed today—ranging from the potential trajectory of interest rates in the coming years to the immediate impacts on the real estate market—underscores the interconnectedness of global events and domestic policies. Big banks’ predictions, the role of the bond market, and the ever-evolving conversation between variable and fixed rates spotlight the depth and breadth of economic considerations at play.
In essence, as we look ahead to the coming months and years, it is conversations like the one we had with Jason that will equip us with the knowledge and perspective needed to make informed decisions. We at Fox Marin remain committed to bringing such insightful dialogues to our readers, believing in the power of informed discussions in shaping a resilient financial future for Torontonians.
Jason Friesen: Managing Partner: As a financial professional who has managed more than $1 billion in mortgage deals over the course of his career, Jason brings a wealth of knowledge, expertise, and experience to the Outline Financial Team. After studying marketing at George Brown College and obtaining his Professional Financial Planner certification in 2005, Jason worked as a senior underwriter with the largest non-bank lender in Canada for two years and then as a Senior Underwriter and loan consultant with one of the largest mortgage brokers in the country. He took the entrepreneurial plunge in 2012, founding Jason Friesen Mortgage and quickly solidified his industry reputation for sales success. Since then, 99 percent of Jason’s business has derived from past clients and referral partners. “I’ve grown my business organically with a focus on delivering high-touch customer service,” he says. Jason made the decision to merge his team with Outline Financial to take that already stellar service offering to the next level. “By merging, we’ve become one of the top mortgage teams in the country, with increased purchasing power to benefit our clients.” In his view, providing the very best client service experience possible means taking the stress and complexity out of the mortgage and insurance process while providing clients with the information they need to achieve their short- and long-term financial goals. “Most people take what their banks are offering at face value and don’t realize that they need to shop around. Nine times out of 10, there is a better product available to them that better suits their needs.”
This article was written by Ralph Fox, Broker of Record and Managing Partner here at Fox Marin Associates. Ralph is a Torontonian native who recognized from an early age that the most successful people in life apply long-term thinking to their investments, relationships, and life goals. It’s this philosophy, along with his lifelong entrepreneurial drive and exceptional business instincts, that help to establish Ralph as a top agent in the real estate market in downtown Toronto.