Canada needs to increase its rental housing supply to alleviate a housing crisis that could worsen, CIBC Capital Markets managing director and deputy chief economist Benjamin Tal told a large crowd Wednesday to open the Canadian Apartment Investment Conference.
People had a sense of urgency about buying houses earlier during the pandemic, he explained during his keynote address at the Metro Toronto Convention Centre, but an increase in interest rates has slowed purchases. The Bank of Canada increased the policy interest rate 75 basis points to 3.25 per cent on Wednesday and Tal said Canadians are more sensitive to rate increases than Americans because they carry more debt.
The slowdown has led to about one-third of planned multiresidential developments in Toronto being delayed or cancelled, according to Tal.
“That means that two years from now, when the fog clears and people are ready to buy and the crisis is over, the supply will not be there.”
That will push purchase prices even higher and further increase the demand for rental housing. Tal noted countries where renting is more prevalent have a higher supply of housing.
With rents rising sharply, Tal said he’s bullish on both the rental market and residential real estate investment trusts.
Raising interest rates to fight inflation
The Bank of Canada believes interest rates will need to rise further to help it achieve its goal of reducing the inflation rate to a manageable two per cent from the current 7.6 per cent.
“At the end of the day, this is not about inflation,” said Tal. “At the end of the day, this is about the cost of bringing inflation back to the normal rate of two per cent.”
The Bank of Canada established a reputation as an inflation fighter and prefers a recession over inflation, even if it means increased unemployment.
However, Tal thinks pushing the policy interest rate beyond 3.5 per cent would be a mistake as Canada’s economic fundamentals remain strong.
Inflation escalation is happening globally and Tal said Canada sits around the middle of the pack compared to other countries.
“Sixty per cent of inflation is coming from outside the country,” said Tal, citing supply-chain snarls that have been impacted by COVID-19, an increase in demand for goods and the war in Ukraine among other factors.
Canada achieved higher real gross domestic product (GDP) growth than the United States in the first half of the year because the American economy opened earlier during the pandemic and spending south of the border increased at that time, but Canada had negative GDP growth in July.
Real GDP growth has run well below employment recently and Tal said productivity needs to increase to provide protection from inflation.
Economies are now dealing with de-globalization and higher labour costs, which are putting profit margins under further pressure.
Tal said corporations have been sitting on large amounts of cash but are now being forced to invest in improving productivity.
Canada’s shifting job market
Young workers entering the job market are more educated and looking for higher wages than retirees who are, or will soon be, leaving lower-paying jobs, according to Tal.
Volatility in employment trends across sectors has remained well above pre-pandemic norms and there’s more movement from job to job and industry to industry than in the past.
Despite Canada having a record-low 4.9 per cent unemployment rate, employers are having trouble finding employees and those who left low-paying jobs during pandemic lockdowns aren’t coming back.
“COVID opened up the market,” said Tal, who also noted the increase in people working from home. “The market is more accepting, flexible and dynamic, especially for highly educated people.”