Affordability crisis plagues housing market

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

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Benjamin Tal, deputy chief economist, CIBC 

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The question is to what extent the Canadian economy can deal with the current environment, the uncertainty, the fog of uncertainty that we are dealing with. And the short answer is that we are very vulnerable. There is no question about it. 

If you look at overall GDP growth, we are operating at very close to 0% growth. If you look at inflation, it’s under control. The unemployment rate is rising, which means that the Bank of Canada will need to cut interest rates, and continue to cut interest rates in order to stimulate economic activity because, quite frankly, the fog of uncertainty due to economic policy coming from south of the border is a major issue impacting the psyche of the consumer. And of course, business investment is negative, which is something that we have to take into account as well. So I think that the Bank of Canada has no choice but to cut interest rates, especially in an environment in which the inflation story is not so alarming. 

In addition, clearly the consumer has been behaving well — has been acting strongly. But this is mostly the “elbows up” issue. Namely, people are spending more than they expected. At the same time, the savings rate is going down, which is unsustainable. So the overall story [is that] we are okay, but being okay is not enough in this environment. We have to stimulate activity, and for that, we need lower interest rates. 

I think that the call is for the Bank of Canada to cut interest rates and stimulate economic activity. However, this is not certain. If inflation is not behaving and if inflation is actually higher than expected, as we have seen in the past, the Bank of Canada will decide to sit on its hands, which I believe will be suboptimal because this economy needs economic stimulus and lower interest rates. 

So the number one risk, of course, is that inflation will not behave, and that’s something that the Bank of Canada will be looking at very, very closely. Overall, we believe that inflation is under control. If you look at the month-over-month rate, it’s slowing down. Clearly, inflation is not a factor that should impact the psyche of the Bank of Canada. Therefore, we still call for lower interest rates in the next few months. 

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Inflation has been a major issue. Last year, everybody was talking about inflation. No longer. Now, we have to remember that all of us go to the supermarket. We are all overwhelmed by how expensive food is. You basically have to mortgage your house to buy a banana or something. 

The Bank of Canada does not care much about it. Not because of the fact that they are not nice people — they are actually very nice people for central bankers — but because of the fact that in many ways it’s irrelevant. 

We have to remember that inflation is a rate of change. It’s not the level of prices. And this rate of change is definitely slowing down significantly, showing that inflation is under control. Why? Because interest rates went up to fight inflation, the economy is slowing down, inflation is getting under control. This means that there is an opening now for the Bank of Canada to cut interest rates, and there is no question about the fact that we need to cut interest rates. 

If you look at the interest-sensitive sectors, like the housing market, utilities, they are not functioning to the extent that they can. The housing market is basically in a recession and, therefore, this economy needs low interest rates, and that’s more or less what we’re going to get in the next few months. 

We look at the Bank of Canada to continue to cut over the next few months. We expect overnight rate — the Bank of Canada rate — to go down to about 2%, or maybe even 1.75% before they call it a day. So we have still a way to go. 

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The housing market in Canada, at this point, is complicated because there is no such thing as the Canadian housing market. It really depends where you live. Alberta is doing fine. Eastern Canada, Atlantic Canada [is] doing wonderfully when it comes to housing starts. At the same time, the housing market in places like Toronto and Vancouver, unfortunately, [are] in a recession. 

What I mean by that is that even there, you have to distinguish between low-rise detached houses, and high-rise, the condo market. The detached segment of the market is actually okay — not great, but okay. The condo space in both cities is basically in a recession. 

We have a situation in which many investors that accounted for about 60% to 70% of the market are now out of the market. And we have a situation in which builders are not building because the cost of building is very expensive, which means that the market is frozen. Nobody is buying and nobody is building. 

This means that slowly, slowly, slowly over the next two years, the inventory level will start going down with immigration — demand still there, but slowing — but supply is not happening because nobody’s building. So two or three years from now, we will have a situation in which prices will have to go up in order to compensate for the lack of supply. 

So the condo market is vulnerable. [It] will continue to be vulnerable. Resale prices in Toronto and Vancouver [are] down by 20%. They will be down by another 5%, 7%. The market will stabilize by 2026, 2027. And then actually, unfortunately, we start going up because we’re simply building nothing at this point. 

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When it comes to the housing market, I don’t think that we are in a bubble. The housing market is slowing down. The condo market is in a recession. This is not a bubble. We are in an affordability crisis. 

Young Canadians cannot afford buying a house, and that’s a major issue. We are failing young Canadians. We need incentives. We need to allow developers to build more. We need more supply. So the housing market is not in a bubble. It’s simply a reflection of lack of supply and very strong fundamentals. 

What we are seeing now is a temporary slowdown in economic activity and, therefore, the housing market. But the true story — the long-term story of the housing market — is of a resilient market with strong fundamentals. We definitely need more supply in this country. 

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To what extent can we use economic policies in order to stimulate economic activity? The number one issue is to stimulate rental demand. We have to create a situation in which you are 25 years old, you are married, you have two kids and you are renting, [and] nothing is wrong with you. [That’s] the way it is in Manhattan, London and Berlin. For this, we need purpose-built rental. 

Any policy that will stimulate activity in the rental space is the right policy. We are talking about cutting development charges and allowing builders to build. We are talking about cutting GST in order to free short-term demand. And that’s exactly what I think the government is going to do in the upcoming budget, and that’s extremely, extremely important. We have to provide short-term incentives and short-term stimulus in order to unfreeze the market. And that’s something that the government can do in a very short period of time. 

In addition, we have to allow CMHC (Canada Mortgage and Housing Corp.) to lend more to developers. What they are doing now is simply not enough. We need to do more of that. Canada needs more CMHC when it comes to financing. And of course, we have to allow builders to build and simplify the process of providing permits, and making it much easier and cutting red tape. 

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I think that when you look at the housing market in general, we have to realize that what we are seeing now is not the trend. What we are seeing now is a blip. The market is slowing down and that’s a very healthy environment because we are basically paying for what happened during Covid where housing prices went up dramatically. So now we are stabilizing. Having said that, this is not the overall trend. The overall trend is actually of a relatively tight market. We simply need more supply, and we have to encourage rental activity in this country, and that’s exactly what is going to happen, in addition to support [for] social housing, which the market is doing now by allocating $13 billion for this purpose.

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