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Housing starts stay strong, but ‘confusing’ fall ahead: Tal

While Canadian housing starts have gained momentum and are on pace for more than 200,000 this yea...

IMAGE: Benjamin Tal, the deputy chief economist at CIBC. (Courtesy CIBC)

Benjamin Tal, the deputy chief economist at CIBC. (Courtesy CIBC)

While Canadian housing starts have gained momentum and are on pace for more than 200,000 this year, CIBC World Markets managing director and deputy chief economist Benjamin Tal expects things to slow down in the final quarter.

“Through July, August and September, we’ll see very strong numbers and housing starts will remain elevated,” Tal said during a July 13 Canadian Real Estate Forums webinar.

“My fear is that October, November and December will be a very confusing period for the economy as a whole because the virus may be in its second wave and will coincide with the flu season and the cold season.”

The annual Canadian housing starts forecast fell to 160,000 early in the COVID-19 crisis, but things have picked up substantially because some construction sites never closed and most others have been reopened by governments.

Tal doesn’t believe the pace is sustainable, however, due to health concerns which are likely to reduce productivity and an expected drop in demand later this year. He believes 170,000 to 180,000 will be a realistic number for housing starts by the final quarter.

Demographic shifts and real estate

Immigrants, non-permanent residents and international students have been the major drivers of Canada’s population growth and housing demand in recent years.

Due to COVID-19 restrictions, Tal said the number of immigrants is down by 85 per cent and 500,000 international students won’t be coming to Canada this year.

“Vacancy rates are starting to rise and we don’t see the demand that we usually get in the summer, and that will probably get worse over the next few months. I suggest that vacancy rates will be rising and rents will soften, and are already softening.”

However, Tal believes the 3.5 million Canadians living outside the country — including 400,000 in Hong Kong — may compensate for the decreased immigration that’s expected into next year or early 2022.

“We’re already starting to see money finding its way from Hong Kong to Vancouver and Toronto,” said Tal. “I would not be surprised if, when it’s possible, you’ll see more and more people coming from Hong Kong, given its uncertainty with China.

“Four hundred thousand people can land tomorrow because they have Canadian passports.”

Tal also expects the “brain drain” of 100,000 Canadians moving to the U.S. every year to slow. Like returning citizens, people who don’t leave will need places to live and work.

“Working from home is becoming mainstream, and that means we have a situation in which you can work for an American company in New York from your basement in Etobicoke,” said Tal.

“This means that maybe the number of brain drainers will go down and more Canadians will stay at home and represent a de facto shadow demand for real estate.”

Tal said about 15 per cent of Canadian homeowners with mortgages deferred payments when the COVID-19 crisis struck and banks will stop deferring payments in October.

There are fears this could cause a wave of mortgage defaults, but Tal doesn’t expect it because most homeowners have relatively high credit scores, are employed and aren’t receiving Canada Emergency Response Benefit (CERB) payments.

Economic recovery stronger than expected

Overall, Tal said indicators are showing a stronger economic recovery than expected.

He credits government spending and support programs for preventing a total economic collapse, but believes it’s time for some policies to shift so funding isn’t spent wastefully and is instead used in the most effective ways possible.

“The bleeding has stopped and income is rising faster now than before,” said Tal, who said money should be moved from CERB payments to wage subsidies.

While Canada and most other major developed countries seem to have “flattened the curve” of COVID-19 infections, Tal is concerned things are going the other way in the United States where numbers continue to rise.

“The U.S. is clearly an issue that we have to take into account, because its inability to deal with its virus situation is going to impact not only Canada but also the global economy.”

Monetary policy, stock market and unemployment

The stock market has made a V-shaped recovery, led by technology companies, but Tal believes the premiums on those stocks might be too high.

“This market can remain, more or less, where it is, with some negatives maybe coming because of China and the U.S. election, especially if (presidential candidate Joe) Biden will keep the pressure on China but also raise corporate taxes,” said Tal. “That will be negative for corporate earnings.”

Tal said Canada’s monetary policy of keeping interest rates low, but not dipping into negative figures, has helped the economy. He expects interest rates to remain very low through 2021.

“Both the Bank of Canada and the Fed (U.S. Federal Reserve System) will make sure there’s enough liquidity in the system. As long as inflation’s not an issue, they have an unlimited ability to print money.”

Deglobalization is moving faster than anticipated, which could lead to higher production costs and pockets of inflation in the future, according to Tal.

While about 40 per cent of the three million jobs lost in Canada during the early stages of the pandemic have been recovered, Tal said half of them are part-time. He believes a significant number of permanent jobs have been lost for good as part of the fallout.


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