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Tal holds fast to forecast: Interest rate cuts likely this summer

Real estate market 'can do extremely well' when rates do come down,

CIBC World Markets deputy chief economist Benjamin Tal. (Courtesy CIBC)
CIBC World Markets deputy chief economist Benjamin Tal. (Courtesy CIBC)

CIBC World Markets deputy chief economist Benjamin Tal believes major global economies are slowing down, but told the audience at the Feb. 27 CBRE Canadian Market Outlook in Toronto he thinks that’s a good thing for the Bank of Canada.

“If I tell you tomorrow that GDP (gross domestic product) in Canada will expand by four per cent and the job market will create 70,000 new jobs, is it good news or bad news?” Tal said during an interview with CBRE president and chief executive officer Jon Ramscar. 

“For the Bank of Canada, it's terrifying. It's very bad news because it means that they're losing the fight against inflation.”

But there has also been a dose of bad news for Canada, via negative productivity. This has been a result of the population growing by too much in too short of a time, according to Tal, resulting in a large pool of cheap labour and little motivation for companies to increase productivity. 

Inflationary forces are in play and putting downward pressure on profit margins, which Tal said were easy to achieve over the past 20 to 30 years. Investment is now needed to increase productivity and profits, and Tal believes Canada will see a wave of it over the next 10 years.

Immigration must include more construction workers

Tal doesn’t believe the number of Canadian immigrants will decrease, but he would like to see the points system for who’s admitted changed so more skilled tradespeople and construction workers can come to the country to replace the 300,000 sector employees who are scheduled to retire over the next 10 years. 

Tal said the ratio of construction worker immigrants has decreased from four to two per cent and that must be reversed in order to meet the housing, infrastructure and other needs brought on by Canada’s growing population.

There should be a lower quota for international students coming to Canada as Tal said many of them aren’t attending legitimate universities and colleges -- and 20 per cent aren’t even students.

These people are competing in the rental market and exacerbating the country’s housing shortage and affordability issues, he noted.

Labour market is normalizing

Ramscar said the rate of employees returning to their Toronto offices has been slow although it’s now picking up somewhat. 

Tal said the labour market is normalizing and the bargaining power of workers is decreasing. This is empowering companies to tell employees to be in the office four days a week instead of two or three, which will help the ailing office market.

Canada’s inflation rate dropped below three per cent in January and Ramscar asked Tal how he thinks that will impact interest rates. 

“This is not about inflation,” Tal replied. “This is about the cost of bringing inflation down to two per cent. 

“The Bank of Canada, the Fed and the ECB (European Central Bank) have established reputations as inflation fighters and are not going to toss it away. They will do whatever it takes to bring down inflation to two per cent.”

The Canadian economy is at close to zero gross domestic product growth and is very close to a recession as inflation decreases. Tal said the inflation rate is already at 1.5 per cent if you exclude interest rates on mortgages as other countries do.

Shelter inflation accounts for 35 per cent of Canada’s consumer price index, according to Tal, and is rising quickly due to increasing rents, real estate commissions and mortgage interest payments. 

“The Bank of Canada is raising interest rates to fight inflation and higher interest rates are leading to higher mortgage interest payments that are leading to inflation,” he said. “It’s simply crazy.”

Interest rate cut could come in June

Tal doesn’t think the Bank of Canada will cut interest rates before June. Reiterating comments from presentations to commercial real estate professionals last fall, he believes 2.75 per cent is a good number and that it can be reached by April or May of 2025.

“The real estate market, given its fundamentals, can do extremely well at a three per cent overnight rate the minute you know the trajectory,” Tal said. “That's exactly where we're going and I would say that's a good thing.”

Tal believes Canada’s residential real estate market is in the ninth inning of a recession and he described it as “a buyer’s market with no buyers.” Demand and activity is starting to rise, however.

“The low-rise segment of the market is going to do much better than the condo space,” Tal predicted. “We still have a lot of inventory in the condo space that we have to clear and that will take about a year.”

Tal expects a sharp rise in condominium prices once that happens because units that were supposed to be under construction now aren’t since it doesn’t make financial sense for developers. So while demand will be there, supply won’t. 

The Canada Mortgage and Housing Corporation said 3.5 million new homes must be built by 2030 to restore affordability.

Tal said its numbers are obsolete since its projections were based on lower population totals so the quantity of houses needed is actually much higher.

Jon Ramscar’s wrap-up

Ramscar concluded the session, which preceded the RealCapital conference at the Metro Toronto Convention Centre, by addressing a packed hall.

“The office sector is performing worse and better than you think with the gap between quality and commodity buildings widening,” said Ramscar.

“Industrial deceleration is both expected and healthy. The housing affordability crisis is likely to worsen and the return of buyers will cause prices to ramp up. 

“We also have a tendency to underestimate the impact of new technologies and the pace at which artificial intelligence capabilities improve and replace workers.

"So the next decade will be unprecedented but, overall, don't give into the naysayers. Canada and Toronto have incredible potential. 

“So, to wrap, our industry, our cities and the world around us are going to look a lot different in the next five years. I am confident we can leverage our collective experience, our creativity and our momentum to win the future that we all want right here in Canada.

"Everyone, the future is ours to make, and it's much more than real estate.”

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