I heard a radio interview* with Jim Stanford, Senior Economist with the Centre for Future Work that really resonated with how I view the state of the market right now and I wanted to share.
The actions of the Bank of Canada have seemed to me to be out of step with what is best for Canadians. They have increased interest rates further and faster than any other central bank in a major industrial country. As Jim Stanford put it “Our approach in Canada seems to be uniquely strict”.
The BoC states that the Inflation is a result of an overheated domestic labor market and excess domestic demand. As was explained in the interview, the BoC believes the problem is too many Canadians are working, and Canadians have too much money.
The interview goes on to state that this diagnosis justifies their remedy. Throw a bucket of cold water over the entire economy. Get unemployment back up there. Make people desperate and reduce price pressures.
Jim continues to explain that our economic growth should be at a certain point. Each year we grow a little bit due to population growth, increase productivity, and more technology. If you follow that trend we are well below where we should be if it were not for the pandemic.
As the interview came to an end, Jim went on to say that the problem is we have too few goods. We are not producing up to potential. The solution is NOT to jack up interest rates and slow down overall growth. The solution is to encourage more capacity, more investments in infrastructure, and more investments to solve those supply chain problems. Employers and businesses think a recession is coming and they are probably right. They are going to hold off on investments right now and this will further negatively affect the state of the market.
So how does this affect Real Estate?
Over the past several months, every interest rate hike was reflected in the price and the level of activity in the market. Buyers became weary and sellers were reluctant to sell at lower prices. As interest rates continue to increase the market will remain down. If we enter into a recession, this will negatively impact the market even further.
Meanwhile, demand for housing continues to grow. With 405,000 immigrants to Canada in 2022, and plans for 465,000 in 2023, 485,000 in 2024 and 500,000 in 2025, they are going to need a place to live as well. Our current housing situation is desperate for more houses and this sudden increase in population is only going to make it more severe. The state of the market is going to get worse.
At the same time, the interest rates are discouraging investors and developers. It’s not just about mortgages and loans, the price of materials has gone through the roof as well. New home builds have been severely delayed, postponed, or even cancelled. While demand is increasing there is no way supply can keep up. Government may look at ways to minimize red-tape but it will not help much if the interest rates keep going up.
Looking to the future, this is what I see coming together. Interest rates will possibly see another increase before the end of 2022 and will continue until inflation is under control. A recession is almost certain if we are not already in one. While in the recession the BoC will likely lower interest rates to encourage the economy. This is pretty clear, though the timeline is uncertain. I have heard anywhere between 13 months and 3 years time. I believe it will be somewhere in the middle of those projections but there are several influences that make predicting the time line like throwing darts while blindfolded. What I can predict with 100% certainty is that the demand is still high and only getting stronger. The market will recover but the interest rates are the main driver behind when.
Referrence:
* Newstalk 1010 John Moore October 27/2022
https://www.iheartradio.ca/newstalk-1010/audio/podcasts/jim-stanford-senior-economist-with-the-centre-for-future-work-explains-his-fears-of-job-losses-and-widespread-economic-suffering-as-the-bank-of-canada-hikes-the-key-rate-a-sixth-time-1.18694275?mode=Article
