Housing crisis

Interest rates could worsen Canada’s rental housing crisis: Tal | RENX

Benjamin Tal, Managing Director and Deputy Chief Economist at CIBC Capital Markets. (Courtesy CIBC)

Canada needs to increase its supply of rental housing to ease a potentially worsening housing crisis, CIBC Capital Markets Managing Director and Deputy Chief Economist Benjamin Tal told a large crowd to open the Canadian Conference on Wednesday. investment in apartments.

People had a sense of urgency to buy homes earlier during the pandemic, he explained during his keynote address at the Metro Toronto Convention Centre, but a rise in interest rates slowed purchases. The Bank of Canada raised the key rate by 75 basis points to 3.25% on Wednesday and Tal said Canadians are more sensitive to rate hikes than Americans because they are more indebted.

The slowdown has caused about a third of planned multi-residential developments in Toronto to be delayed or canceled, according to Tal.

“It means that in two years, when the fog lifts and people are ready to buy and the crisis is over, the supply will no longer be there.”

This will push purchase prices even higher and further increase demand for rental housing. Tal noted that countries where renting is more prevalent have a higher housing supply.

With rents soaring, Tal said he was bullish on both the rental market and residential real estate investment trusts.

Raise interest rates to fight inflation

The Bank of Canada estimates that interest rates will need to rise further to help it achieve its goal of reducing the inflation rate to a manageable 2%, from 7.6% currently.

“At the end of the day, it’s not about inflation,” Tal said. “At the end of the day, it’s about the cost of bringing inflation back to the normal two percent rate.”

The Bank of Canada has earned a reputation as an inflation fighter and prefers a recession to inflation, even if it means rising unemployment.

However, Tal thinks pushing the key interest rate above 3.5% would be a mistake, as Canada’s economic fundamentals remain strong.

Escalating inflation is happening globally and Tal said Canada is in the middle of the pack compared to other countries.

“Sixty percent of inflation comes from outside the country,” Tal said, citing supply chain issues that have been hit by COVID-19, an increase in demand for goods and war. in Ukraine, among other factors.

Canada recorded higher real gross domestic product (GDP) growth than the United States in the first half of the year because the US economy opened up earlier during the pandemic and spending south of the border increased at that time, but Canada recorded negative GDP growth in July.

Real GDP growth has lagged far behind employment growth recently, and Tal said productivity needed to rise to hedge against inflation.

Economies now face de-globalization and rising labor costs, which put further pressure on profit margins.

Tal said companies were sitting on large amounts of cash, but are now being forced to invest in improving productivity.

Canada’s Changing Labor Market

Young workers entering the workforce are better educated and seek higher wages than retirees who are leaving or will soon leave lower-paying jobs, according to Tal.

Volatility in employment trends across all sectors has remained well above pre-pandemic norms and there is more movement from job to job and industry to industry than in the past.

Although Canada has a record unemployment rate of 4.9%, employers are struggling to find employees and those who left low-paying jobs during the pandemic shutdowns are not coming back.

“COVID has opened up the market,” said Tal, who also noted the increase in people working from home. “The market is more tolerant, flexible and dynamic, especially for highly skilled people.”