Ep. 26 - Interest Rates and the Future of Toronto Real Estate

In this episode of The Last Honest Realtor podcast, host David Fleming sits down with economist and advisor Ben Rabidoux to discuss the intersection of real estate, economics, and government policy. As the founder of North Cove Advisors and Edge Analytics, Ben brings his sharp analysis and a wealth of data to this fascinating conversation about the current and future state of the housing market in Canada.

Together, David and Ben dive into everything from interest rate hikes to the challenges facing developers and the shifting dynamics of the rental market. If you’re a real estate enthusiast, investor, or industry professional, this episode is filled with insights you won’t want to miss.

In This Episode:

• Why interest rates are reshaping the Canadian housing market
• How the Bank of Canada’s policies impact homeowners and renters
• The future of pre-construction and condo developments in Toronto
• The role of government-backed loans and the CMHC in today’s market
• Why rental markets could see significant shifts by 2026

Timestamps:
00:00 - Introduction
00:06 - Meet Ben Rabidoux: Economist and data enthusiast
01:15 - How interest rates are influencing the housing market
10:30 - Are we heading for higher mortgage delinquencies?
20:45 - The rise of purpose-built rentals and government incentives
30:00 - Toronto’s condo market: Overbuilt or underpriced?
45:20 - Will CMHC’s new policies survive the next election?
55:00 - The real risks of pre-construction appraisals

Don’t Miss:

• Ben’s take on why Canada’s population growth could slow dramatically
• David’s thoughts on municipal policies and development costs
• A deep dive into why the Toronto condo market faces unique challenges

Subscribe to The Last Honest Realtor on YouTube or your favorite podcast platform. Like, comment, and share your thoughts—what do you think of Ben’s predictions? Let us know in the comments!

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Transcript

SPEAKER_02: 0:00

Hello, everyone, and welcome back to The Last Honest Realtor. I'm your host, David Fleming. Thank you so much for joining me today. This is going to be a very fun episode as I take you to a previously recorded interview with your friend, my friend, the esteemed Ben Rabideau. Now, Ben is an economist. He is the founder and president of both Edge Analytics and North Cove Advisors. And Ben is also one of my favorite people in real estate. Now, of course, Ben is not in real estate. As I mentioned, he's an economist and an advisor. But what I mean is that in the 20 years that I've been in real estate, Ben is one of my favorite people. He is absolutely brilliant. He is, I don't know if you describe him this way, but a stats nerd. after my own heart. Ben has all the data. He has all the thoughts and opinions like me. And also like me, Ben has been wrong. Ben has been right. But Ben loves to talk all things real estate and the economy. So today, I'm going to take you to our interview. We cover a lot of ground. Watch on YouTube. Listen wherever you get your podcasts. And of course, this will be up on TRB as well. I hope you enjoy. Joining us today is economist and all-around great guy, Ben Rabideau. Ben, are you aware that you have a fan club?

SPEAKER_00: 1:12

I have a fan club? Yeah. Well, that's got to be, that's, you know, there's an old saying, like, I don't want to be a part of any club that'll have me.

SPEAKER_02: 1:19

Oh boy. Well, honestly, it's, it's funny because like, we all have our interests and like, you know, I, I might be a nerd cause I collect hockey cards or what have you, but like in Toronto, there are people that their hobby is real estate economics. And I think of like the Ben Rabideaus, uh, the Ron Butler's, the John Pesalis is like, these guys have followings. They have fan clubs, like legitimately on my blog, uh, John Pesalis is known as LG, which I think is short for Lord God. It became, it started as a joke, but it's real, but like you have a fan club, you have a serious following, you know.

SPEAKER_00: 1:51

Oh, there you go. Well, I hope it's because I add a little bit of value to the discussion. Right or wrong, I hope I at least make people think.

SPEAKER_02: 1:58

Of course, of course. And that's why we're here today. So thanks for joining me. I figured it's been a while since we've connected. And in past, we would have blog readers ask questions and you would answer them. Some questions were good, some not so much. One person asked, is a hot dog a sandwich, yes or no? And we actually spent about four minutes on that. But today I finished, I figured we would just shoot the proverbial you-know-what. By way of introduction, and I'll see For those that aren't aware of who Ben is, although I'm very sure that they are, North Cove Advisors. Ben and I have known each other for about 15 years. He is smarter than I am, which is a problem. But to your benefit today, Ben's shaking his head, Ben is going to provide a lot of data and insight that I ordinarily would not. I'm a stats guy, but I don't typically have your level of statistics.

SPEAKER_00: 2:45

That's scary when you say we've known each other for 15 years, just thinking like, how many times in those 15 years have I been right versus you've been right? Like, I feel like you're being pretty, you're being very generous by saying that I'm smarter than you. That's certainly, the scorecard does not bear that out, David.

SPEAKER_02: 2:58

Well, I guess for background, you know, I wouldn't call you a real estate bear. I'd say you're a stats guy and you're an economist. And for a long time, Ben has always sort of said, here's what the market's saying. Here's what the data is saying. Here's what the numbers are saying. I feel like in this war that we have in Toronto, which, which is, is interesting. And this is why I say so many people are fans of, of folks like yourself and John Pesalis or Benjamin towel. Um, but in this war between the bears and the bulls that has been going on for so long, people use data to try to create an argument. And I feel like you have been maybe un fairly labeled as this perma bear. And I would say that you're an economist. You go where the data goes. And you would say, hey, here's what the data is saying. Here's what in another market, or in an ordinary market, or just on the blackboard in first year university with an x and y-axis, here's what should be happening in the market. And then I come and sit down and chat with you and another bunch of guys. And we say, wow, the market's absolutely on fire. And you get people from other markets and other jurisdictions around the world who just cannot make sense of it. How in the world does the Toronto real estate market keep going. That's what I've been hearing for 15 years, basically.

SPEAKER_00: 4:04

Yeah. Yeah. Well, I appreciate that. I mean, yeah, like you said, I try to at least, you know, I have had a, you're right. It's, it's funny. Like, as you know, well, if you, if you have a negative view on something, media wants to talk to you all day.

SPEAKER_02: 4:16

Yeah.

SPEAKER_00: 4:16

Right. And so, and, and so like you, you know, it's not as well publicized, but I was, I was probably the first one to say that the mortgage or the whole mortgage deferral cliff merger in COVID, everybody deferred their mortgage. There was this view that, that like, that was going to be a huge disaster. And I was like the first guy to be like, no, no, here's why that's not going to be a problem at all. And I want to, and then I was first one that I know of in like 2021 saying, based on how tight the market is nationally, we're going to see record high house prices later this year. Yeah. Now that doesn't show up in the media. Right. Cause as soon as you say that, no one in the media wants to talk, but you know, if you come out and you say, you know, I think we might have an oversupply of condos for the next couple of years. Everyone It's like, oh, shit. Hey, tell me about that. So you end up with this scenario where it's like, you know, you Google someone's name and it's this long trail of, you know, negative comments about the market and never any any indication where they've kind of made a pivot, which, you know, I have. But I think you're the point is still fair that I've probably been a little more cautious on the market than has been warranted in the past.

SPEAKER_02: 5:09

Yeah, and that's a fair point. And so you made an interesting, although scary point. Yeah, it's been 15 years since we've been having this banter. Home prices on the whole have gone up. There have been obviously some dips and some peaks and valleys here. I guess start there. One of the first things I wanted to chat with you about was just sort of what you had mentioned about this idea that we had been told there was going to be this huge amount of mortgage deferrals. What I'm curious now looking back, I can't believe it's been four years since the pandemic started. Did the government have any plan to deal with a fallout? And I know it was an unprecedented time. Remember that one unprecedented times was the buzzword, but we saw them slash rates and go down to zero. Did they foresee this massive increase in real estate prices? Was this just a fact of, Hey, this is what we're doing. We're trying to save the world. Like, was there a plan in place at the time that you can remember?

SPEAKER_00: 6:03

Like a plan to unwind it or what are you saying? The plan all along to goose housing, uh, to deliberately kind of boost the economy.

SPEAKER_02: 6:10

Well, I mean, just the plan of like, hey, we're in unprecedented times. Let's slash rates. Was there any idea that this could actually see home prices shoot to the moon? Or was this just a byproduct of we never had any idea? We didn't know what we were doing. We were planning one day. I mean, again, I can't fault whether it's CMHC, Bank of Canada, Justin Trudeau, the liberals, whoever at the time. Was there any sort of forecast that we could see this massive run up housing prices, and then we've got to increase interest rates in response. Again, I hate to use the word unprecedented, but what we saw with the rate increases, 10th rate increases, we've never seen before.

SPEAKER_00: 6:50

Yeah, so I mean, I think with the benefit of hindsight, we can look back and it's easy to forget like just how scary the early days of COVID were. And there's like this saying where it's like, look, if the shit's about to hit the fan, you have to do something even if it's wrong. And policymakers were in that position where they really had to do something. Like there was a chance that we would be facing the sort of economic crisis that would have paralleled the Great Depression. Like it was a really serious economic shock. So they did have to do something. You know, with the benefit of hindsight, I think we can all agree looking back that the extent of fiscal stimulus, the amount of money that they actually put in people's pockets, especially at a time where they could not really spend it, right? Everyone was cooped up, so it all just ended up getting saved. And then the moment the economy reopened, it got blasted into the economy through all these experiences that were kind of postponed during the pandemic. You know, clearly that was excessive. Now, what I would say is you had a central bank that made a really bad mistake by standing there in, I guess it was 2020, maybe early 21, and saying to Canadians, you can be sure that interest rates are going to stay low for a long time, which basically just rang the dinner bell for anyone who wanted to speculate on housing. And then that same governor was then in the situation where once inflation did start to rise, they'd kind of put themselves in a situation where it's really hard to raise rates at that point because you were the one that told people to go ahead and lever up effectively. And so then they made kind of the opposite mistake, which was that they kind of held off tightening longer than they should have hoping desperately that this inflation was in fact transitory. It turned out not to be. And then they were behind the eight ball and they were forced to have to raise really aggressively. So you had like a series of just errors. I think it's easy in hindsight to attribute some of that to just like, you know, malice or, you know, just general incompetence. But the reality is it's a hard job, right? And the economy is complex and people's behaviors are complex and you just... we assume that policymakers and central bankers are these all-knowing entities. In reality, they're just trying to figure this shit out just like we are.

SPEAKER_02: 8:57

Yeah, and I guess one of the other questions regarding that is, would you say that they... were too slow to raise rates in 2022 and then too slow to decrease rates in 2024? Because it seems like they were wrong the first time and wrong the second time, which to me is just fascinating.

SPEAKER_00: 9:16

Yeah, well, certainly with hindsight, we know they were too slow in raising rates. I mean, we had inflation at 30-year highs, and real rates were negative by like 4 percentage points, which is kind of unprecedented. Without question, that was a mistake. You know, in 2024, were they were they late in cutting? Like, I think you could make that argument. The pushback to that is just that, like, you know, you're starting to see some pain in the economy, but it's not it's not like the economy is falling apart. Like you are seeing signs at the edges. There's definitely these rates are hurting. There's no question. Yeah. Would they have moved maybe a few months earlier? Like, yeah, but it's not, I mean, they weren't. See, the problem is like, David, you're in the thick of it. You're right in the crosshairs being in the real estate space. So your perspective on the state of the economy is very different than someone, you know, who's in a less interest rate sensitive industry. And I think that- If you take a step back and look in broad brushstrokes at the economy, it's actually doing much better than I would have thought. I think if you and I had been here two years ago and we'd said rates would hit 6% and you'd have mortgage rates in the sevens and house prices would basically have ticked down a little bit and then flatlined for a year, we probably would have been like, it's probably going to be a lot worse than that. You know what I mean? I would have bet worse. So Maybe they were a few months too late. Now, I think what I would argue, though, is we're in a situation coming up now where they will be forced to continue to cut pretty aggressively because I do think in as much as the economy is slowing at the margins, you are starting to see the interest rate sensitive part really start to get hurt. And I think if they wait, so to your point, if they wait much longer, like I have a view that the overnight rate has to get down to under 2%, which is a different view. Yeah. So right now, if you look at like the curve, so the markets are kind of expecting that the terminal rate for the bank hands to kind of the low point, the cycle is going to be 2.75, at least the time I looked. And so that would imply another 150 basis points-ish of cuts. And they're expecting we're going to get there by the end of next year. Man, I think that's still way too high. I just think that for a number of reasons that we can talk about, I do think it's got to get considerably lower than that. And if it's not... then we risk more significant economic fallout. Now, the add-on to that discussion is that I do think Trump also complicates that story, right? So there's a lot we can spend the next hour just talking about rates, but do you want to go there? Why I think rates have got to go lower? Where do you want to take this?

SPEAKER_02: 11:47

I want to come back to that, I guess. Anytime I hear the word Trump, I get nervous, but not necessarily for me, for the viewers, for the listeners, everyone's on their side of things.

SPEAKER_00: 11:56

Well, you can't ignore them, right? That's the problem is you can't ignore them now.

SPEAKER_02: 11:59

You can't like them. You can't hate them. You can't, it's just, it's a lose-lose all around. Just one thing I want to circle back to was I had talked about this unprecedented series of rate cuts. And it wasn't just the Bank of Canada. It was the entire world. It was COVID. It was the pandemic. Why is it, because I remember all these articles of people talking about, oh boy, in 2024, 25, 26, we're going to see the mother of all defaults and every house is going to be up for sale. People are going to be walking away, leaving the keys for the bank, all of this nonsense. And again, the media exacerbates everything, right? If it bleeds, it leads. And we haven't seen that. Can you tell me why? We have not seen this massive, it sounded like, you know, one out of every 10 people was gonna default. They can't make their payments. Why did that not come true?

SPEAKER_00: 12:46

Well, I mean, I think there's a couple of things. The first and most obvious one is that generally people don't default that they still have a job, right? So the state of the labor market matters a lot and not just the state of the job market, but in particular, it's not unemployment that matters, it's long-term unemployment, right? So if you're unemployed for a couple months, probably not going to default on a mortgage if you can find another job in six or eight weeks, right? But if you can't find a job for a year or for six months even, very different outcome. And so one of the indicators to watch is the trend in long-term unemployment. And in that context, I would just say that's one of the concerning dynamics that I'm seeing in the labor market. You're seeing a real sharp increase in long-term unemployment that's being masked by the fact that the overall job market looks okay, but the reality is if you lose your job today, it's very hard to find another one. That's a problem. Up until recently, that's been a big one. If you have a job, by and large, you're not going to default. That's one. Second thing that I think we all underestimate is just how much savings people had accumulated during the pandemic and held on to. And so you can see that in the data. Households are still saving to some extent, but that has provided a bit of a cushion. But the big one is also just that the big renewal years are 25 and 26. And that's always been the case. Now, you had a cohort of... variable rate borrowers that had the true floating payment. So in Canada, 70% to 80% of our variable rate mortgages, the payments don't actually move. You know this well. You get these negative advertising mortgages in the worst case scenario. So all that to say, up until now, it's arguable that only about 40% of borrowers have even felt the rate increase. Maybe half. The bank account says half. I think it's maybe a little less than that. Where it becomes more problematic is you get it 25 and 26. And there, like this is one of my, the core reasons I think the bank account has to get a lot lower is if you look at, okay, so we actually have data on the number of mortgage originations every month, like the dollar volume and the average interest rate that they were originated at. And so you can actually see there's this cohort of borrowers that took out mortgages between late 2020 and early 2022. And the average interest rate is under 2%. And in a lot of cases, it's like 1.6 at the lowest. Yeah, it's

SPEAKER_02: 15:04

wild. Yeah.

SPEAKER_00: 15:05

Yeah. And then if you aggregate how much that is, it's about a third of the outstanding mortgage balance in the country. Now you roll that forward. You got a blob of about a third of the mortgage debt is going to renew. You kind of roll that for five years on average, let's say. It's renewing at 25, 26. And so if you just model out like a really simple analysis that I do is I say, okay, let's assume that the average rate is 2%. and let's take the very best widely available mortgage they could roll into, whether it's variable, one-year, two-year, five-year fixed, whatever it is. What's the best rate they could theoretically roll into? Three and a

SPEAKER_01: 15:38

half.

SPEAKER_00: 15:41

You're not going to get three and a half today, right? No, but I'm talking about by June of next year. Okay. Well, this is my point though. This is my point. So as of today, that payment shock is still going to be about 40% on average. Now, If the employment market is still fine, okay, it's going to get vented through much lower retail sales and the Canadian tires of the world will be hurting and cottage sales will be a bit crappy. But it's not going to be a mass default. But if that coincides with a bit of a softening of the broader economy and an uptick in unemployment, you definitely will see arrears tick up. We're still only 20 basis points nationally. They're going to double from here. Right. Like it's I mean, that's not a scary prediction.

SPEAKER_01: 16:22

Yeah.

SPEAKER_00: 16:22

40 basis points, like just a little bit above the long term norm. So I think that's where we're going. And that's that's the core you have to watch. And if you're the Bank of Canada, you're acutely aware of that. You actually had Carolyn Rogers last week come out and give a speech and comment on that exact dynamic, saying, like, basically, that's the cohort we're worried about. We still have work to do. They can't be more clear. They got to get rates a lot lower. And so, you know, that's where they're going to go.

SPEAKER_02: 16:44

Well, it's interesting. You made the point. I was chuckling on the inside, trying not to let my inner voice out. But now I will. When you talked about all the incredible savings that people had, and I thought about that amazing interview with Krista Friedland. As you know, I'm such a huge supporter of this level of government. When Krista Friedland said, we need to unlock that savings. If anyone has any ideas, we'd like to hear from you. And I thought, wow, how great of this government to say, all these people that have scrimped and saved, and now she wants to take it. Um... Anyways, don't need a response on that because maybe you want to keep your beliefs a little more internalized than mine. But no, I don't like her. I don't think she's qualified for her role. Then again, who is? But that savings comment will, of all of the political comments I've heard from this government in the last decade, that incredible one about how do we unlock that

SPEAKER_00: 17:35

savings? That was crazy. Good for

SPEAKER_02: 17:37

her. So for all those people that have been saving, don't forget, your government wants to take it from you. Well,

SPEAKER_00: 17:43

they want to force you to spend it was what she was trying to get at. Oh, yeah. I forced you to stop saving

SPEAKER_02: 17:47

it. I knew, yeah, okay. The positive person says, well, what they're talking about is how do we encourage you to go out there and place your money back into the economy? That's one way of looking at it. My way of looking at it is if this government got back into power, we're four years from them knocking on your door and saying, we hear you have four TVs. There's someone that doesn't have one, so we're taking one of yours. That's where this is headed. Anyways, that aside, you made the point about Let me regroup here. What I'm thinking is you had this big talk of all of these defaults, all of these deferrals because rates were so high. I almost feel like we got lucky with the timing. I remember renewing my mortgage. My mortgage came renewed. Excuse me, I can't talk today, Ben. My mortgage came due November 1st of this year. So when rates were at the absolute peak, I thought, oh my God, this is going to kill me. And they came down and down and down and down. And it's manageable for me. The people that in 2025 or 2026 are going to renew, I think that what could have happened had they had to renew at the peak of rates in 2023, it seems like they're kind of let off the hook. And then the second point you made is that the Bank of Canada is actually looking at this massive renewals and are they, aside from unemployment and the economy and what the world economy is like and the U.S. Federal Reserve, are they making their interest rate decisions partially based on what's going to happen next year with all these mortgage renewals?

SPEAKER_00: 19:13

Oh, 100% they are. Amazing. Yeah, no, 100% they are. So a bank candidate, they do have to be somewhat, like they don't want to always be reactionary. Like if you see something coming down the road and you have the coverage to cut rates. If you see something coming down the road that's going to be a real problem, you're going to want to, as best you can, get ahead of it. And look, this is a very different discussion. If we were sitting here and inflation was still 3%, 4%, 5%, it's a very different discussion because then you're like, well, their number one mandate is to control inflation and so they don't have any options. They've got to let us go through it. But when we're here today and you've got CPI at 1.6 overall and you've got core inflation barely over 2 and you've got X shelter, it's only 0.6, which is important because The thing that's driving shelter right now is mortgage interest costs, which is a direct input from the Bank of Canada. So there's a lot of things they might lose sleep over when they look at inflation, but high mortgage interest costs from something that they've caused is not going to be one of them. So they can look through that. So they're looking at CPI that's effectively at 0.6%. When you have that kind of tame inflation backdrop, it gives you a lot of latitude to look forward and be like, hey, that's a problem down the road. Let's get ahead of that. They couldn't do that if inflation was 4% or 5%, but they can do it today.

SPEAKER_02: 20:26

So I wouldn't say they lucked out because, look, they did start increasing rates. Inflation was 8.1% at the peak, which I think was June of 2022. And so you went in 2023. Oh,

SPEAKER_00: 20:43

man, I

SPEAKER_02: 20:45

should know. go up and come back down. And on the other hand, you now have the Bank of Canada saying, well, we've got to be on the lookout for this. So I almost think all of these people are going to end up dodging a bullet. And these people that would have, could have, should have lost their house, according to the bears and the naysayers, they're going to be absolutely fine in a year or two.

SPEAKER_00: 21:20

Yeah, I would push back a little on that. I would say that 20 basis point of mortgage. So, okay, let's quantify what we think might happen. Sure. Are we predicting a repeat of the financial crisis in the US? Like, no.

SPEAKER_02: 21:32

No,

SPEAKER_00: 21:33

no. But is it sensible that, like, first of all, I'm not of the view that rates are going back to zero. So when I said they got to get sub 2% on the overnight rate, that's still a mortgage rates in the high threes, mid threes. Like that's not, that's not your, you know, the 2020, 2021, you know, sub 1% variable, crazy stuff that we saw, but you're fundamentally a different.

SPEAKER_02: 21:54

Yeah. I was going to say, you're talking about like, look, I, I don't want to come off as rude here, but I don't have a lot of sympathy for the person that got a 1.69% five-year fixed, but based all their assumptions, uh, on another 1.69% five-year fix when they come up for air in 2026. I think that's

SPEAKER_00: 22:11

very poor plan. Well, those are the guys that will be in some level of trouble. And so here's my point, just to square that. Sure. So we're now in an environment where I don't want to call it higher for longer because we're still talking about like, there was a time, remember Jim Flaherty freaked out when mortgage rates got below three?

SPEAKER_02: 22:27

Yeah.

SPEAKER_00: 22:28

And he was like, this is way too stimulative. Like I'm saying, we're probably going back to 3% rates, right? Yeah. that's not a disaster, but it's not an environment that's conducive to 20 basis points or mortgage delinquencies. You'll be double that. You may be considerably more than that. So, so, you know, I'd be careful. Like in one sense, you're going to end up with mortgage delinquencies that effectively tripled off the lows. That's not nothing. I think that's where we're going. And, but it's not, it's just not a, it's, it's not a disaster.

SPEAKER_02: 22:55

Yeah. And I, I, I wrote about this on my blog, I think last week, like looking, looking at the delinquencies and, Well, that's my point. That's my point.

SPEAKER_00: 23:17

Can it stay there? Yeah. Like in an era where we do have higher rates, do you think that we're going to be considered, like, does it make sense to you that after a period of ultra low rates with the leverage in the system, that we're going to stop, the pendulum will stop exactly at the long-term norm? Or do you think it might overshoot the long-term norm? Like to me, this is just a kind of a first principles type thing. Like we've been through an era where mortgage linkedness is where I would argue artificially low as a function of artificially lower rates amongst other factors. Do we think that we're going to have a period where it overshoots the other side, like things always do in every cycle? Like I would say yes. Well, the long-term norm is 30, 30, 35 basis points. So if you, if we assume you're going to overshoot that, which I think is likely, like, I don't think it's, you know, 40, 50 basis points. It was not a disaster, but that would be like a, you know, three to almost four X increase. And I'm talking nationally. So Ontario got as low as like eight basis points. So could it get up to like 30, 35? Like, yeah. Like, I don't think that's a crazy thing to say in this environment.

SPEAKER_02: 24:12

I'm going to predict. No, it's not based on anything. You can say that this is a gut feeling or this is me cheerleading the market. I'm just going to predict no. It is nothing more than a gut feeling. But I guess for me, I look back and like, look, I'm 44, so there are a lot of people that are going to be like, you don't remember 21% interest rates. But I've been doing this for 20 years, and it's kind of funny because now I'm at that– time in my life where there are younger people that have never seen these rates right now. So like, my first interest rate was 4.99% on a five year fixed in 2005. And my dad told me rates will never be this low 4.99 is insane. And he told me take the 10 year at 679. And obviously, you know, that wouldn't have been a good idea. But I'm looking at this now. And you're saying, you know, rates are going to be if we have a five year fixed rate, next June of 359. And It is so high compared to the 169s people were getting during the pandemic. But 359, to me, having started my career in 2004, that is so incredibly low for anyone to think that that's high. And I understand if you're at a 169 and you bought for a million bucks in 2021, now you got to renew at 369. First of all, your house... probably up$100,000,$150,000 at worst, depending on where you bought. But second of all, a 359 rate five-year fix, that is so incredibly low. And I'm not talking about comparing to our parents who had 21% when home prices were$40,000 and a lot closer between average wages and average home price. But I just don't think this is going to be problematic. I think that, yes,

SPEAKER_00: 25:41

you may have- I think you're maybe dunking on the quote-unquote bears a little prematurely, and I think that you're not maybe accurately framing... Look, there are some crazies out there that are like, this is going to go down 95%. Okay, whatever. Set those guys aside. But in general, I would say, from a base case, do we think arrears are going to stay below long-term averages with rates above average? That doesn't... compute to me i think we're going back to an era where yeah you get like 30 40 base points like in the u.s they're consistently one so we're still like half of a like i'm not arguing there's gonna be disaster i just i i think that i just think you're gonna see a long grind higher in mortgage arrears over the next couple years that's not a disaster but it's certainly not we're not going back to like the like i don't think you're gonna see the all-time lows in mortgage delinquencies no maybe like not until our kids are have kids let's say You know

SPEAKER_02: 26:37

what I'm saying? I don't want to. My daughter's turning eight this week, so I don't want to think

SPEAKER_00: 26:40

about it. You've got a long time to go, right, before I think you're going to see more delinquencies or interest rates back to those levels, I think.

SPEAKER_02: 26:46

So next question, I guess, just while we're on rates. I know you don't love predictions, but on my blog earlier this year, we had a game. We, I think, had 22 contestants, and it was about where interest rate's going to go. So I had three questions. One was, when is the first cut? And we know that was June. The next one was, what is the amount of the first cut, which was 25 basis points? And the last one was, what is the cumulative cut for the entire year? So amazingly, or maybe not so much, everyone was light because we are going to end up seeing upwards of 175 basis points. The highest prediction, I think, was 125. Of the 20, 22 people, two people said zero cuts this year, which... In hindsight, I had to go on the blog and say, I don't know what you guys were thinking. Ironically, though, if the Bank of Canada did not make another cut, I would win my own game. But they're going to make a cut. So is this cut going to be 25 basis points or is this going to be 50 basis points? I won't hold you to it.

SPEAKER_00: 27:45

Well, let's go back in time. So you go back and listen to some podcasts that I was on in the spring. I will. So like there's a good podcast called The Market Huddle, which is a really well-respected markets-based kind of economics finance podcast. And I was on that podcast and I said at the time, I said, and this is, by the way, this is when markets were pricing in 50 basis points of cumulative cuts for this year, which I was like, that's absurd. They're going to cut way more than that.

SPEAKER_02: 28:09

Yeah.

SPEAKER_00: 28:10

And I said that by the end of the year, the discussion would turn from not just do we need rate cuts, but will 25 basis points at a time be enough? Okay. And the guy who's interviewing me is like a longtime market veteran, very bright guy. He's like, you know, as a derivatives trader for you, very bright guy. And he goes, whoa, that's a, that's an aggressive call. So, like, there was nobody that was saying by the end of this year we'd be looking at more than 25 basis point cuts. Like, you're looking at the guy. And I don't get a lot of things right, so when I get, like, something really right, like, you're going to hear about it. So, look, where do I think we're going from here? I think that we're going to get another 50 basis point cut in December. And I think you're going to get another 50 basis point cut after that in January. I love that. So, look, I think they have to get the overnight rate under 3% immediately. and then have a long-term view that they probably have to get back under two by the end of next year. And that's still 75, 100 basis points above where the market thinks it's going.

SPEAKER_02: 29:06

Yeah, because we're down 125. We're going to get 50 in December. So we'll be down 175 for the year. What I couldn't really figure out is banks get to revise their predictions. And so you would see like We looked at this in March, and the average of the banks was predicting 75 to 100. And then four months later, they're all predicting 100 to 125. They just kind of go with the flow. No one wanted to get it ahead like you did and make this monster prediction, because why would they if they can just revise their predictions, which is what the banks have been doing all year?

SPEAKER_00: 29:39

Yeah. I mean, it's tricky because the economic data does change. So when the economic data changes, unless you're just... ignorant or whatever, like you just, you have to revise your thinking. Now, look, having said that I completely missed how high they were going to go. Like, I didn't think the bank was going to hike as much. So like I was way off on the upside. So, you know, I feel, I feel good about at least calling the downside pretty well. Um, so who the hell knows, but I just come back to kind of first principles and I like to me, look, fundamentally rates at these levels break the Canadian economy in a way that they don't break other economies. We are just way more sensitive to these high rates. And, you know, it's easy enough to sit there and go, well, good, we need that. And there's an element of me that's like, yeah, you're right. Like we do have to have some element of kind of financial accountability and responsibility. And yeah, maybe we need slightly higher rates to induce more business investment, all this other stuff. Like I'm sympathetic to all that, but fundamentally at the end of the day, you have to ask yourself not what should the Bank of Canada do, but what will they do? And they're going to cut. So they're going to want to avoid the worst of the outcome. And if they don't cut that much, then I do think some of those more bearish scenarios come into play. And the other thing that we're not discussing, and this is also what forms informs my view is I have a view and you're not going to love this, David, but I have, I'm

SPEAKER_02: 30:54

ready. I'm listening

SPEAKER_00: 30:55

that the population is the growth in population is going to slow way more than people think next year. Okay. And, and that is one of the reasons why I think the bank is going to have to get rates so low because so much of our economic growth has been driven, not by productivity, but by just expanding the population. And that's changing. Like that's, people are still sleeping on how big a deal these immigration reforms are in Canada. And by the way, this is not my view. The federal government told you that they're going to shrink the overall population for two years in a row. That's their own projections of where they think they're going. If you're the Bank of Canada and you put any credibility or any weighting to that forecast, your rate has to go way lower.

SPEAKER_02: 31:37

Yeah, I mean, the immigration thing is, I don't even want to get into it because, again, not to be

SPEAKER_00: 31:41

political. But you can't have a view on rates and housing and the economy without having a view on immigration. No,

SPEAKER_02: 31:46

I have many views. I just like... like I said, don't want to get too political, but Justin Trudeau has started to unwind his entire policy, which to me is just, this guy created an absolute tire fire of this country. And I remember once somebody in an open forum asked him about immigration and he turned to a Canadian and said, there's no room here for your racism, ma'am. And this is what's trending today. And it's like, they've completely unwound this idea that, hey, we need all time high immigrations. And Trudeau sat down yesterday and put out this like cool guy sitting on a couch and 30-second clip of, hey, here's what went. And of course, he blamed corporations for it. So listen, I'm not blind to the policies. I just am frustrated by this complete reverse turn by the government, good or bad, just because it's like, why do you now get to do this? You've made this mistake. And now you're going to like, if anyone is ill-equipped to correct it, it would be the people that did it in the first place. But Ben, we got to take a quick break here. If you don't mind, give me one second. We're going to reboot and we'll come right back to it. Okay, we are back here with Ben Rabideau. If you missed part one, it's good. Go back and listen to it or watch it. We're going to talk more. First segment, we were talking a lot about interest rates, Bank of Canada and what they did four years ago. I think now we're going to chat about things moving forward. Ben, we were just talking off camera. I gave you some ideas and you were all eager to go. Why don't you hit it?

SPEAKER_00: 33:14

Yeah, happy to. Well, I think, okay, so take a snapshot of current market you're sitting at. all-time highs in terms of condo listings on the market. A lot of one-bedroom, a lot of stuff that, as you know well, is not necessarily. A lot of cookie cutter smaller units. If you're looking for something a little more desirable, larger unit, there's a lot fewer of them. But set that aside, lots of inventory in the condo market. No reason to think that's not going to continue, unfortunately. Now, on the single family, it gets a little more interesting because you are sitting at the highest level of standing inventory since 2009. But when you look out at what's happening with housing starts and building permits, this is something I've been flagging for a long time. We've had building permits now that are at 40-year lows in Ontario. and have been running at that level for the last year and a half. We've had housing starts now that have fallen to basically 60-year lows for single family specifically in Ontario. You're in this weird situation where I could argue it both ways. I've kind of said to some of my clients, I've got some developer clients that kind of want to pick my brain about where I think parts the... I'm really bullish on certain parts of the country. I've been extremely bullish in Alberta for a long time. I actually think now... Like, I was extremely bullish on Calgary. I actually think Edmonton's going to do amazing and outperform. Really bullish on Saskatchewan. Getting pretty bullish on parts of Quebec. So, like, there's lots of areas where I'm bullish. Right now, I just think, like, Toronto, it's almost, like, for the time being, it's almost in the too hard bucket. Like, I could argue it both ways. There is going to come a point where demand is going to start coming back and it's going to come into a supply constrained market because there's just not going to be a lot of new completions. What is on the market will get that inventory will evaporate pretty quickly once sales start to normalize.

SPEAKER_01: 34:52

Yeah.

SPEAKER_00: 34:53

And the thing you got to remember is if you look at sales on a per capita basis, one of the things I've been pointing out to my clients. on edge analytics is, um, on a per capita basis, sales in Ontario are basically at the lowest level since the nineties and have been there for over a year. So that tells you there's a lot of pent up demand, right? And so that at some point that gets unleashed, everything is cyclical. Single family housing demand is going to start to come back at some point, whether that's a 25 story, whether it's 26, I don't know. I think it's probably starting to inflect higher right now. Um, and again, You can certainly make the argument that that's going to hit into a supply-constrained market, and that market will tighten really quickly. That's the possibility. Condos are even more tough to get a handle on because you've got a lot of completions. You're going to have very strong completions for probably most of the next two years. But then beyond that, I've got this great chart where I look at new condo sales and you kind of overlay it on top of condo starts. And you can see the condo starts are going to get absolutely smashed. They're going to be almost zero. They're extremely low for a couple of years. And what that tells you is that, yeah, you've got an oversupplied market right now. It's probably going to stay oversupplied for a little while. But man, you push this out to 28, there's going to be almost no completions. 29, same thing. So even there, you can see where everything is cyclical. The bad time setup make the setup for the good times. And you could argue even there, there's going to be an opportunity, maybe a 26 story to start looking for some really compelling. I don't know, but that's kind of my lay of the land. Now that's like high level. The other thing I would point out is I think, so going back to this concept of pent-up demand, I've said to my clients, I think you're going to have at least six months of really good sales, like strong sales. You'll see an uptick. You'll have a decent winter. I think you're setting up for a decent spring next year. Beyond that, who knows? And again, I think that a lot of that is related to this pent-up demand, cutting rates, and then you're starting to see consumer confidence come back. So I think those three things, lower rates, higher confidence, pent-up demand, you're going to have at least six months of decent sales. Then you get into the question of, well, how seriously should you take the whole Trump thing? tariff threat because that's man that's not a small issue for a lot of these ontario towns yeah you know trump really does put a 10 tariff on all manufactured imports that's i mean that's just a really big problem so that that's a 25 story and you never know with trump because a lot of stuff he says is just a negotiating tactic and he's not actually serious like who the hell knows that's that's what i was

SPEAKER_02: 37:30

thinking yeah

SPEAKER_00: 37:31

yeah so i just right now i just think from my perspective you're not going to love to hear this but from my perspective if you put about a million dollars to allocate and i was going to invest some more My way of thinking is there's parts of the country that have really clear long-term tailwinds behind them. And when I say long-term tailwinds, what I look for in a market is I look for very low resale inventory, strong demand. But more importantly, I look at what's under construction for homeowner units. So I back out rentals. And there you have a snapshot of what could happen. prospectively become resale supply in the future. So if you find a market that's got good economic fundamentals, very tight resale market, strong demand, very little resale inventory in the pipeline, you don't have to overthink it. That's a market that's going to perform well for the next year or two. And so that's what got me bullish on Calgary. That's what's got me very bullish on Edmonton, Saskatchewan, parts of Quebec. It's less clear in Ontario that the inflection point. So I just feel like you could do really well investing in Ontario right now and in Toronto. I don't know. But I just feel like for my money, there's just easier places to make money. There's less uncertainty around the outlook. So I

SPEAKER_02: 38:39

have so many thoughts and follow-ups to that. But before I forget, an anecdotal story. This is one I haven't told you. And off-air, maybe I'll give you some more info.

SPEAKER_00: 38:48

I love your anecdotes, by the way, every time I perk right up.

SPEAKER_02: 38:52

Well, because I can't name names, but I will off air. So as I've told you before, side hustle for me, I work on land consolidations, land assemblies, and I've been doing it for about six years. And I work with a pretty prominent developer, of course, through a middleman, because you know how these folks are. This very prominent developer is completely uninterested in building condos. Doesn't want to do it. You know why? Because the government's going to loan 95% if they build a rental. So picture this. Let's say there's a site in downtown Toronto. I pitched them two years ago. And they were ready to buy that site to build a condo or to try to build a condo for, say,$40 million. That site that we offered$40 million on and didn't even get a conversation was now offered to me for$25 million because the person who owns it is hurting. And The only way that this developer would consider buying this is if they were to build a rental. Because number one, the city of Toronto will probably work with you if you want to build rentals. If you want to build a condo, you've got to rezone all this stuff. This is zoned neighborhoods, not apartments. So number one, you need the city to work with you. Number two, if the federal government's going to loan you 95% of the cost, this developer is laughing and saying, this is my new business model. So imagine a condo developer... getting out of the condo development game and getting into rentals. Like, what does this say for the future of the resale condo market? Does this add more fuel to the fire for, you know, you're saying 28, 29 when nothing's completed? Because I see zero, well, not zero, but what's the stats? Like, pre-construction sales are down 80%. Why they're not down 100%, I don't know. Who's paying 1,800 a foot for something right

SPEAKER_00: 40:35

now? Well, I'll tell you why they're not down. I'll tell you why they're not down. Sure. You get some units. Well, that's not true. That's more the single family space, but you're seeing like townhomes that are very specifically being laid out to accommodate uh for example international students you get like you know eight bedrooms right like so those things are still moving the old eight bedroom town yeah yeah like crazy stuff like i've seen some of that you know those those sell out quickly

SPEAKER_02: 40:59

the funny part about that eight bedroom town is it's only 700 square feet

SPEAKER_00: 41:03

oh i know man i'm kidding i know okay so listen i'll give you i'll give you an unconventional view sure um So I would tell your developer friend to make use of that program while it lasts. Because it's not gonna last. And here's why I would say that. First off, if you look at what's under construction for rentals, people are kind of quietly sleeping on the fact that we've got like a ton of rentals under construction. So if you actually, so if you look at it in the context of, The existing rental stock, you have about 7% of the existing rental stock that's under construction, which means all else equal over the next couple of years, that rental stock is going to expand by 7%. Now that's going to come online into, so let's get back to what the government's trying to do in terms of curbing population growth. All of that curbing the population growth is coming via a reduction of temporary residents. And by their own math, they're targeting a 900,000 reduction in temporary residents over the next two years. They're all renters. So the one thing that's driven up the rental market that's caused all the craziness is that we had this enormous expansion of temporary workers, international students. I mean, they were up like there were two years running. We had 800,000 annual growth, two years running. I mean, you drop a million and a half temporary residents into the country and they're all renters. Your rental market goes apeshit. But now let's look at the flip side of that.

SPEAKER_02: 42:22

But

SPEAKER_00: 42:23

now you're in an era where the government's telling you they're actually going to shrink that number. Now, we can talk about how plausible that is. I think it's extremely plausible they're going to get there. And that's going to happen into an environment where you've got a 6% or 7% expansion in the existing rental stock. I'm telling you, we're going to be here. You come back here two years from now, the vacancy rate of purpose built is not going to be 1, 2, 3. It'll be double that.

SPEAKER_02: 42:47

I'm going to bookmark that somehow. I probably won't remember. My short-term memory is going.

SPEAKER_00: 42:51

And so then the next question is, in that environment, is there still going to be an appetite, especially under a conservative government that has been highly antagonistic towards CMHC? Is there still going to be an appetite for those 95% LTV loans from the government? So I would say get it while the getting's good.

SPEAKER_02: 43:07

Interesting. Okay. So then in terms of the labor market, construction costs, whether it's the HST. What I'm seeing and what I've written about on my blog, and this is going to sound highly unoriginal for somebody with slightly fiscal conservative views, is that people are so quick to blame investors, developers, speculators, real estate agents for the run-up in real estate prices. But if you look at what it costs to construct a square foot, it's 1,000, 1,100, you have expenses running absolutely out of control. Is it any wonder right now, you've got a developer that needs to charge 1,700 a foot in downtown Toronto and pre-con, no one wants to pay it. It comes with all the caveats of the uncertainty, the delays, the deficiencies, the cancellations, the investors aren't into it. How in the world are we actually going to get a shovel in the ground over the next, say, three or four years when it's costing more just to build than it does to buy resale next year? Yeah, I

SPEAKER_00: 44:07

don't know. I don't think you can. I thought you were going to tell me. No, I don't have a clue. So you're hitting on the fundamental pinch point in the market. And the one thing that's interesting is you are starting to see a bit of recognition that that's where the pinch point is. I hope. And that the absurd, irresponsible run-up in development charges is actually a fundamental impingement on trying to restore affordability.

SPEAKER_02: 44:36

Thank you.

SPEAKER_00: 44:37

So look, you're starting to see that recognition. The question then is just like, well, where the hell do you make up the revenue? But from my from what I'm seeing out of Ottawa, they're recognizing that's where the pinch point is. And they're trying to figure out how they can get the cities on board. You're starting to see some municipalities recognize it. Man, I don't have a good answer for that. The math doesn't math. You can't make those numbers work.

SPEAKER_02: 44:59

The thing about taxes is you have to take from Peter to pay Paul. So the irony is, and I don't care who it is, if Doug Ford wants to cut the license plate renewal and put 200 bucks in your pocket, great, 200 bucks coming from someone else's pocket. So no matter which government does it, municipal, provincial, or federal, no matter what tax it is. But the reality is I've been saying, and just as I was early, if I want to toot my own horn here for a change, I was a bit early in terms of the, oh my God, there's so many issues with pre-construction back when people were like threatening me.

SPEAKER_00: 45:27

Yeah, man, you nailed that. You don't get enough credit for nailing that as well as you did. And also for being, let me pump you for it. Here we go. No, no, seriously, man, because I think you went out of your way and against potentially your own business interests.

SPEAKER_02: 45:42

And career.

SPEAKER_00: 45:42

To flag that risk of buying at a substantial premium to resale and what that could imply when it comes time to closing if that gap doesn't narrow. And so much of what you were writing about years ago is now starting to come to pass. So kudos to you, man, because that's not an easy thing to do in your industry, to go out there and talk against the interests of some powerful players. No, I got

SPEAKER_02: 46:02

threats from agents, from brokers from lawyers, from developers. I was doing, you know, you remember the pre-construction versus cake video filmed on a

SPEAKER_00: 46:10

shaky. I love those, man. I love those. Those are so good.

SPEAKER_02: 46:13

It was literally. And if you look at the footage today, it's like, it's like, sorry, was this on your Blackberry? It was like, no, this is on my Nokia 9,800. But you know, the, the other thing I was going to say was that I was early to this idea that, um, you know, sounds somewhat libertarian, but like the government's driving up the price of real estate. And everyone was like, no, it's evil developers. And you see these signs, you know, for development downtown and somebody spray paints, you know, on the side of it, like, you know, screw developers or whatever. 25 to 30% of the cost of new construction is through the three levels of government. I've been saying this for 10 years. And just like with pre-construction, just like with the condominium act and all the issues and with the cancellations two years ago, government starts standing up and saying, we've got to do something about these cancellations. I've been saying this for 15 years The cost of building a square foot, if you had a$600,000 one bed, one bath, it would be$430,000 without any taxes. And I know that's unrealistic, but the point is there is so much tax embedded in the cost of building. And now you've seen that big conglomerate of developers that put together an open letter and said to the government, you've got to help us. And everyone's going to say, screw the man, screw commerce, screw corporations. But I just, Ben, I don't understand how, how anything is going to get built. And aside from the, you know, international student rooming house, if you're trying to build downtown Toronto, no one wants 300 square foot condos and no one wants to pay 1800 a foot. And I've already asked you and you said, I don't know. So it's rhetorical, but I just, I look at, and full disclosure, I bought two condos this year. I've told you. I've told some of your clients. I've written about it on my blog. Maybe I was six months early. I bought the first one in Feb. But this is a long-term play for me. And I'm looking at three years from now, and we've got zero completions because no developer sold anything in 2024. No one's going to sell anything in 2025. If it's going to cost$1,100 to build a square foot of condominium downtown, how the heck is it developers supposed to sell anything?

SPEAKER_00: 48:13

Yeah, no, I think you're right. If you're buying something that's way under the cost of production, I mean, over the long term, it's really hard to lose money. That was my thing. I can't argue that. I mean, I

SPEAKER_02: 48:24

don't

SPEAKER_00: 48:26

know what the solution is, but you are starting to see like a glimmer that maybe municipalities are starting to recognize that they've got a role in this, like maybe. See, the problem, and I've argued this for a while too, and I don't know what the answer is, by the way. So I'm pointing to the same problem you are. But like I've said for a while that you've got this weird scenario where the demand function for real estate is largely controlled at the federal level, right? It's immigration, it's income taxes, it's CMHC, it's monetary policy, which technically isn't federal, but you know what

SPEAKER_02: 48:57

I'm saying? It's at the high level.

SPEAKER_00: 48:59

Yeah, yeah. But then the supply response is largely determined by municipalities. And there you've got Every Joe Blow councillor has got to listen to his next door neighbor bitch about, oh, I don't want that shadow or there's going to be too much traffic. You can't get anything built that way. So you are seeing this recognition out of Ottawa that they need this carrot and stick approach where they basically have to force municipalities to get their goddamn act together and pull in the same direction because that is where the issue is.

SPEAKER_02: 49:30

Well, you raise the point. They're going to go with those people no matter what. But I look at in my area, Midtown and Leaside, you've got all these plans for towers, which is great planning because it's near the subway. We spend billions of dollars to run a subway across the center of the city. And every single person in this area has a sign on their lawn saying, no construction, no towers, poor planning. And the city councilors are just going to go with it. So I know we're on borrow time here, Ben. So just a couple more questions. CMHC, they increased the mortgage cap from$1 million to$1.5 million. They increased amortization to$30 years. Good policy, bad policy. Is this long overdue? And then sort of what do you, what do you see on the horizon of any other policies?

SPEAKER_00: 50:29

Yep. So the 30 year, I think makes total sense. There's no, I mean, there's no fundamental reason to lock someone into 25 years. You've had 30 year mortgages in the U S forever. They work fine. We've had three year uninsured in Canada forever. They work fine. So I don't have any fundamental issue with that. The 1.5 million, I would push back a little only because,

SPEAKER_02: 50:44

you

SPEAKER_00: 50:44

know, Like, man, you know, in my neck of the woods, which is, you know, a little bit removed from Toronto, a million and a half still, you're sitting lakefront. Like, you've got a nice place lakefront. So if you go back to the original iteration of CMHC, it was originally set up after World War II to help returning veterans get into entry-level housing. Yeah. And that's what its initial mandate was. And so if you look at other insurance schemes globally, like, for example, even in the U.S., Most of them have this kind of tiered model where if you're in a high cost of living area, the insurance is capped at X. And if you're in a lower cost of living area, it's capped at Y. Because the thinking is you don't want to be providing government backstop and artificially low mortgages for someone to effectively get into a five, six bedroom lakefront home. Wait,

SPEAKER_02: 51:31

is that not the intent of this?

SPEAKER_00: 51:34

Well, you could argue that. That was

SPEAKER_02: 51:35

sarcasm. I was

SPEAKER_00: 51:36

being sarcastic. I mean, to me, that's just crazy policy. So you could make the argument that, yeah, maybe a million and a half in Toronto, Vancouver, a handful of metros makes sense. You almost need a tiered approach. In the tier A metros that are most expensive, here's your cap. That to me makes a lot more sense. But I would caution all that. I mean, I guess I would add to all of that that, man, I'm highly skeptical that those changes are going to survive the next election. Really? You think they could unwind it? Wow. Well, just go back and listen. I went back and listened to every interaction that Mr. Paulievers had with the heads of CMHC, whether it was Evans et al., or whether it was Romy Bowers. I mean, anyone from CMHC, that dude is on their ass about everything. He is highly antagonistic to everything and very much not in favor of the kind of distorting effect of insurance and also has made a number of good points very publicly about like, hey, can you name another insurance scheme globally where the covered party does not pay a deductible?

SPEAKER_02: 52:36

Yeah, I know.

SPEAKER_00: 52:36

Right. And they're always like, no. So I'm just saying this idea that a conservative government is going to love a massive expansion in that program, especially one that deviates so far from their core mandate. I think I just can't see it surviving.

SPEAKER_02: 52:53

I mean, it is somewhat unprecedented. And you know what? I read on my blog, and I'm going to typecast and say that they're usually an older demographic. But the people that have an issue with CMHC, they continue to say, why am I, the Canadian taxpayer, backstopping the banks who are backstopping a young person that wants to buy for$1.5 million with$150,000 down? Somebody wants to buy for$1.5 and take out a$1,350,000 mortgage. Why do I, the taxpayer... have to backstop this. And I see that, but at the same time, and this is maybe a defeatist attitude, I'm not a defeatist, I think it's too little too late. I think the system that we have, the CMHC and basically the government of Canada, they cannot allow real estate to fail. It is way too big. And we kind of do have a permanent backstop because the bears that want prices to go down 40%, that would literally destroy the entire economy and country. So I kind of think policy aside,

SPEAKER_00: 53:49

I kind of think we're stuck with it. Man, dude, I don't know about that. Well, let's say, okay, let's say this. So from the peak in 2022, we're down nationally 15, 17%. Yeah,

SPEAKER_02: 54:01

yeah.

SPEAKER_00: 54:01

Like where are the fucking bodies? Like, dude, like, so you're talking about a 30, 40%, like there's no goddamn banks blowing up anywhere. Like banks are still sitting with like extremely low provisions. Like there's nothing's blowing up. So man, I don't know. I don't know if that's true. I think, I think you could almost make the argument that if you're actually serious about trying to grow the economy and try to funnel more investment into more productive measures, what you need to do is like remove some restrictions around business investment, get out of the way. Oh, and by the way, like, maybe stop incentivizing people to make all their money in real estate and try to say, hey, why don't you go out there and create businesses? You know what I'm saying? From that perspective, and I think that another government might be a little more sympathetic to that. If you go down 30%, is the economy going to blow up? Dude, we're halfway there. There's not even any smoke anymore.

SPEAKER_02: 54:51

Well, I agree with you as far as like, look, how do you incentivize, and this is a larger political conversation, how do you incentivize people to start a business if they're being taxed to death or to keep their money or their business or their world headquarters in the country? Why wouldn't somebody move overseas or move to the States? I think that's

SPEAKER_00: 55:07

part of- Or why don't they just leverage as much as they can and buy the biggest house and accrue the tax-free capital gain? Tax-free capital gain, yeah. You know what I'm saying? If you are actually serious about trying to bring, improve productivity, drive business investment, We have a fundamental problem in that we've made it too easy to make money in real estate and not easy enough to make money creating a productive business. And that's got to levelize. And part of that is, like, I'm sorry, but you can't be throwing government backstops at a million and a half mortgages so some guy can live on the water. Like, that's

SPEAKER_02: 55:37

crazy. This is counter to what most real estate agents would say. I don't disagree. I've said that for a long time. I think the fact that the, you know, the, I guess on the flip side, if you didn't have the CMHC backstopping the banks, the banks would probably be more aggressive and charge higher. And then it would just fall back on the consumer. Would it not? So I

SPEAKER_00: 55:53

don't know. Yeah. So no, that's a fair point. So you can see it in the spread between insured and uninsured mortgages. Sure. Right. So uninsured mortgages are call it 50 basis points higher than insured. Yeah. And so there you go. So like banks recognize that there's, you know, a bit of risk that they have to bear and they charge for that.

SPEAKER_02: 56:09

And it's almost like we're punished. Those of us that don't need the insurance and have done well to put down, you know, you're being punished for making a higher down payment. But I guess it all comes out in the wash in the end. Anyways, the banks seem to be doing fine is the point of it. Unless you're TD and it's just scandal after scandal. Right.

SPEAKER_00: 56:23

I mean, I think there's more scandals just hiding. Listen, there's a saying, there's never just one cockroach. If you see one cockroach, there's a bunch of them. I don't think Canadian banks, I think they've been very fast and loose with a lot of the rules.

SPEAKER_02: 56:35

Well, and we talked not too long ago, I won't name names, about what happens when you buy a pre-construction condo for$600,000 and then it's down 40%, but magically the appraisal four years later comes in at the price they paid because that particular bank doing the appraisals that are financing it well they're just giving you the appraisal for what you paid even though pre-con has completely tanked there's a scam waiting to happen

SPEAKER_00: 56:58

yeah listen i think that at some point that that's going to make its way into the media um there's definitely people trying to figure out how to put pen to paper and write about that and yeah i think that's something osprey's going to want to comment on the tricky thing is is it's actually good risk it's a good risk practice right so the Just to explain to your listeners what we're talking about, you've got some of these condo developments that were pre-sold at peak, and just to use a round number, let's say they were sold at$1,000 a square foot. So you're contractually obligated to deliver$1,000 a square foot on this unit to the developer when it completes. But the resale market might only be, just to use again a round number, like$700,000 today. So you've got this 30% gap where a bank would come in and say, well, we'll loan you 80% of the fair market value, but you've got to deliver the full... thousand a square foot. So in other words, if the banks were underwriting properly, they would say, look, we can't loan you the full 80% of the thousand dollars a square foot, we'll loan you 80% of what we think it's worth, which leaves this big gap, okay? Now, what we're seeing, to your point, is magically a lot of these developments, the appraisals are coming in in line with the original purchase price, which is to say that they're coming in like 20% to 30% above the actual resale value. And then when you start looking a little closer, you realize, well, sometimes, in some cases, the banks that are giving these blanket appraisals would appear to also be the same ones that have taken on a bite of the loan syndicate and have some exposure. I mean, I don't want to...

SPEAKER_02: 58:25

I don't want to use the word

SPEAKER_00: 58:26

fraud, but... You know, it's not fraud. It's tricky, right? Well, you know, you could argue that they're in violation of the Bank Act. So you could argue that. But all that to say, if you're a bank risk manager, you would rather take a$200 million known problem... And turn it into a whole bunch of smaller potential problems, right? Because one, you're going to get a lot of questions from shareholders. You're going to have to provision against it. The regulator is going to come in and be like, hey, man, tell me about this. The other one, you can kind of like, and you could smooth it out and maybe it becomes a problem, maybe it doesn't. You can't blame them for doing it. But to your point, I would argue it's definitely a violation of the Bank Act. And OSFI is going to have something to say about that, I think.

SPEAKER_02: 59:06

Yeah, and I think for me, it's just the basic smell test is you buy a pre-con for$600,000 at the peak in 2021, and then today, the appraisal comes in at$600,000. Something doesn't make sense. Precon has tanked. You paid tomorrow's price today. And then you're like, you know, if an XYZ bank was the one that did the appraisal today, but XYZ bank was the in-house lender for that developer when you bought, it absolutely stinks. But I would love to see that on the front cover of a newspaper, but

SPEAKER_00: 59:36

I think- I think we'll get there. I know a few reporters that have tried to figure out how to make this work. It's just really hard to prove that it's happening. It's harder than you'd think. Yeah. But a few outlets have tried tried to figure out how to turn this into a narrative, let's say.

SPEAKER_02: 59:51

Okay. Well, maybe more on that next time. Listen, I know we both got to run. There's so much more that we could have covered, but I appreciate your time. And I'm going to put this up on the blog. I'm sure there'll be follow-up questions. I might bug you offline. I might ask you a couple of things, but anyways, good to see you again, buddy.

SPEAKER_00: 1:00:05

Listen. Yeah. You too, man. You've always been really gracious with your time coming down to meet me and meet my clients. So if you want to do a follow-up at some point in the next few weeks or months, I'm happy to jump back on, man. Cause we've got a lot to talk about.

SPEAKER_02: 1:00:15

Amazing. Okay. And if I don't talk to you, Are we saying Merry Christmas yet? I can't believe it, but hopefully I'll talk to you before then. Sounds good, buddy. All right. Have a good one. See you, Ben. Take care. Bye-bye. Well, folks, that's a wrap for my interview with Ben Rabideau, economist and advisor, president and founder of both North Cove Advisors and Edge Analytics. I hope you enjoyed watching or listening to the interview as much as I enjoyed filming it with Ben, because I think Ben is always armed with stats and statistics and insights and analysis and opinion, much like myself. So thank you for watching. If you are on YouTube, listening wherever you get your podcasts, please remember to like, comment or subscribe. And we'll see you next time here. on The Last Honest Realtor.