Here’s an analogy that’s really going to date me, but so be it…
When I first started out in the real estate business, I had lunch with a friend-of-a-friend who was much older and agreed to provide me with some career advice.
To absolutely nobody’s surprise, he told me to meet him down in “The Path,” which sounded like a horror film from the 1980s. Evidently, there was a secret underground labyrinth of tunnels in downtown Toronto where people walked to avoid going outside, while also being able to get their haircut, grab coffee, and occasionally save money buying lunch from a cafeteria-style collection of restaurants, rather than going to Jump, Vertical, Earl’s, or whatever other banker bar was all the rage at the time.
We sat and ate while he explained the ways of the world, regaled me with life lessons, and drew on his own experiences.
I remember at the time, thinking that it was possible he needed me as an outlet for stories of yesteryear, because maybe he didn’t have anyone else to share them with. But as I now find myself around the same age that he was, at that time, I completely understand the desire to find an ear that’s young, eager, ready to listen, and above all, willing to listen.
He was a wealth of knowledge, and I say that both based on the conversations we had at the time, as well as what I know now, looking back.
At one point during our lunch, and forgive me for not remembering the context, he asked me the following question:
“What price do you put on, ‘Oh I’ll stop and pick that up off the ground’.”
I wasn’t entirely sure what he meant. What did he mean by “that?”
He clarified by asking, “What type of coin would you actually bend over and pick up?”
I sat silently, trying to process what he was asking, and he sighed and explained, “Everybody has a price at which they would stop, bend over, and pick up a coin,” he said. “It’s different for everybody. What’s your price?” he asked.
I clearly didn’t answer quickly enough, so he said, “Would you pick up a penny? Would you pick up a dime? Would you pick up a Loonie?” while waving his hands for effect as he named each individual coin.
When you start to process this question and work toward an answer, everybody handles it differently.
Some people think of the currency. They might start at the top (ie. a $100 bill) and work backwards, whereas others might think of the smallest form of currency (we were still using pennies back then) and work their way up.
Others might consider the value of each coin in terms of what it would buy, and thus formulate their answer accordingly.
Suffice it to say: we’d all address this riddle in our own, individual way.
I’m a visual thinker, plain and simple. So my mind immediately pictured the physical currency as it attempted to solve the riddle.
I pictured the brown copper of an ugly penny, sitting in a puddle, maybe in a pot-hole, in the middle of an intersection. I concluded in my mind that I would not stop to pick up a penny. In fact, I had stopped picking up pennies many years prior.
I pictured a nickel, and immediately thought about the hockey-puck-shaped piece of gum that the vintage gumball machines at the local arena use to crank out for five cents back in the 1980’s. I could picture the beaver on the currency, too, and how the nickel was the thickest of all the coins. But as I drew back to the present (this was 2004), I concluded that I probably wouldn’t stop to pick up a nickel if I saw one on the street today.
Then I pictured a dime. It’s the smallest coin and the thinnest. At one point, as a child, I decided to collect dimes, and I had over twenty-five dollars in dimes in the coin tray of an old “cash box” that I bought at a garage sale. But as I sat at the table in that moment, for some reason, I pictured the dime getting stuck on the sidewalk, and concluded that I would not stop, bend over, kneel down, and pry the currency off the ground if one caught my eye.
But then I pictured the quarter. It’s the largest and most expensive of the “original” coins from my childhood, before the Loonie and Toonie were introduced. The quarter was significant. It purchased a pack of baseball cards in 1987. It purchased five “hot lips” candies or “big feet” back in the day. And despite the fact that I was being asked this question in 2004, I couldn’t help but feel influenced by my emotional draw to the currency based on my life experiences.
I told my lunch companion, “A quarter. I would stop and pick up a quarter.”
He nodded and then took a sip of his water. I waited for some sort of big reveal or an even larger life lesson, but nothing was offered.
I asked him, “So what’s the point? What’s the takeaway here?”
He shrugged and said, “I dunno, you tell me.”
There was an audible silence as I waited for him to provide an explanation, and he waited for me to do the same.
Eventually, he explained that while he could tell me what the riddle meant, what could be learned, or how this metaphor could be extrapolated into real life, the exercise would be a thousand times more beneficial if I took some time to reflect on this, on my own.
A few months later, my friend was having people over on a Sunday afternoon to watch football, and I attended and found the friend-of-a-friend in attendance as well. There was a moment when we were both in the kitchen to get a beer, and I said, “I think I understand your ‘stop and pick up a penny’ lesson.”
He folded his arms across his chest, leaned on the kitchen counter, and said, “Explain.”
As I saw this back in 2004, there was no right or wrong to this riddle.
Everybody is different.
Everybody has a different set of values.
Everybody would value this, that, or the other thing differently.
People come from all different walks of life, different backgrounds, different social circles, and different economic statuses.
The metaphor itself could dictate that if one person stops to pick up the dime, but another person has a net worth that’s ten times as high, then that second person would only stop to pick up a Loonie.
But that’s taking everything at face value. That’s simply math, and nothing in life is that simple.
What about a difference in priorities? What about a difference in life cycle? What about stopping to pick up that coin on a sunny day versus a rainy one?
What I learned from this example is that everything is relative. In life, in business, in economics, in personal finance, and to take this a step further – in health and happiness.
You’ve all heard the expression, “One man’s trash is another man’s treasure,” but by the same token, one man’s lottery winnings is another man’s cab-fare.
So where is my analogy going, and what does this have to do with real estate?
As history has shown us, and with the advantage of hindsight, a lot of people really benefited from the Bank of Canada’s central interest rate of 0.25% five years ago.
While this policy was undoubtedly set in response to the COVID-19 pandemic in the spring of 2020, let’s not forget that the prevailing rate from 2019 through 2020 was still only 1.75%. Relatively speaking, that’s a really low interest rate.
There’s that word again: relative.
Ask your parents, or your parents’ parents, and they’ll tell you not just about double-digit interest rates, but double-digit rates that start with “2.”
When the Bank of Canada’s interest rate hit 5.00% in late-2023, it was the first time we’d seen a bank rate set this high since 2008.
Relatively speaking, it wasn’t that high compared to rates from the 1980’s, but relatively speaking, it was the first time that many adults had ever seen a rate this high.
So with the interest rate sitting at 5.00%, and the Bank of Canada signaling that future rate cuts were on the way, I began to consider the metaphor that we introduced at the onset of today’s newsletter, and how it would play into the real estate market:
“At what price do you stop and say, ‘Oh, I’ll pick that up off the ground?’”
The policy rate sat at 5.00% from July 12th, 2023 through June 5th, 2024. All the while, economists, bankers, real estate agents, and buyers and sellers alike began to wonder when the cycle of rate cuts would begin, and how low rates would go.
When we saw the first interest rate cut of 0.25% in June of 2024, many people, myself included, thought that the “smart money” would get out ahead of the rate cuts, anticipating that the masses would flood back into the asset class once affordability and purchasing power were restored. This is how the real estate market had worked in previous cycles.
Two more interest rate cuts of 0.25% took place in the coming months, but the market continued to stagnate. And even when we saw our first “jumbo” cut of fifty basis-points, taking the bank rate down to 3.75%, it didn’t seem as though people were ready to stop and pick up the found money on the ground, metaphorically speaking.
Another fifty basis points were cut in December of 2024, and by year’s end, we’d seen the rate decline from 5.00% to 3.25%.
Affordable enough yet?
Maybe. Maybe not.
Real estate industry participants and those in adjacent industries remained puzzled as to why the double-whammy of lower real estate prices and lower borrowing costs did not encourage more buyers to exit the sidelines and step into the game.
In 2025, we saw the bank rate further decline from 3.25% all the way to 2.25% where it currently sits, and there’s likely another cut on the way this December.
And yet, we’re still waiting for the masses to declare, “Alright, this is where I stop and pick the coin up off the ground.”
Is this about interest rates, or is this about purchase price?
The metaphor can be extended to both.
Consider a buyer of a $1,000,000 property.
At a mortgage rate of 5.95%, the buyer’s monthly payment is $4,733.61, of which an average of $838 per month is principal in the first year, and $3,896 is interest.
But after a reduction of 2.25% in the bank rate, resulting in a new mortgage rate of 3.70%, that monthly payment falls to $3,691.79, of which $1,232 is principal and $2,460 is interest.
The monthly payment is $1,041.82 lower.
Principal repayment is $394 higher per month.
Interest paid is $1,436 lower per month.
And what if the property itself cost less to begin with?
If we were to think logically, and only logically, there are two reasons why buyers could remain on the sidelines in 2025:
1) They feel interest rates will go lower.
2) They feel interest prices will go lower.
At the start of 2024, a would-be buyer could have looked out at the interest rate horizon and concluded with certainty that rates were going lower. The sideline was a comfortable place as a result.
But by the end of 2025, it’ll be safe to say that the cycle of interest rate cuts will be complete. With no more rate cuts in the forecast, the “logical” reason to remain on market sidelines no longer exists.
As a result, I am predicting that buyers will come off the sidelines in the spring market next year. The proverbial coin on the ground that some people might pass by without picking up, is now too great to overlook.
Then again, my argument assumed logic.
There are scores of reasons why a buyer, looking at interest rates that have bottomed out, and a real estate market that has neared bottom as well, would decide not to get into the market.
Fear is the prevailing reason, and don’t underestimate the impact that it can have. The thing is, many people don’t know what to be afraid of. Inaction is often much easier and much more palatable than action, and it comes with far less risk.
You know the saying, “Nobody wants to catch a falling knife,” right? We’ve heard that over and over again for the last two years.
But what’s the exact opposite?
Whatever that metaphor would look like, I believe that’s where we’re headed.
At some point, real estate prices are going to turn around. It’s happened after every decline in history.
Another adage tells us, “Fortune favours the bold.”
But if everybody is being bold in the exact same way, then it doesn’t remain bold for that long, does it?