They Shoot, They... Miss the Net?

On Monday, March 25, 2024, Slavens & Associates Real Estate Brokerage had the privilege of hosting one of the leading experts on real estate in Canada, Managing Director and Deputy Chief Economist for CIBC Capital Markets, Benjamin Tal.

The clearest takeaway from Mr. Tal?

The Bank of Canada is overshooting its fight against inflation by not analyzing inflation the right way and not lowering interest rates.

Mr. Tal made his case through several points. He said that we are in a “per capita” recession, where GDP and spending are both down. This reality is being masked somewhat by the 1.2 million people who have recently immigrated to Canada, but in reality our productivity is declining. 

With regard to real estate, while some segments of the housing market are doing well, such as low rise, the condo market is struggling, with the gap between new construction and resale too wide. While a reduction in interest rates would stimulate the real estate segment, the Bank of Canada would rather fight inflation than take on a recession.

Mr. Tal shared what he called an “Inflationary Buffet”: a matrix of 30 different time-by-variable combinations which demonstrate inflation is anywhere from -1.5% to 3.5%. Commenting that “the narrative determines the data,” he suggests we should forget the numbers. Moreover, Canada takes an unusual approach to the basket of goods it uses to measure inflation. Specifically, because Canada uses mortgage interest payments in its inflation calculation (a highly uncommon practice), Mr. Tal asserts that the actual inflation rate is around 1.5% well below the Bank’s 2% target.

In Canada, we are more sensitive to interest rate changes. With Canadians having depleted the excess savings accumulated during COVID, the high interest rates have a more pronounced negative impact on consumers who no longer have a financial buffer. Unlike the US, where it’s common to have predictable, long-term fixed-rate mortgages, Canada’s much shorter terms make the Bank's policy more potent and more damaging to consumer finances, particularly as many mortgage holders are facing or have already faced increases in their mortgage payments. 

There are several signs of optimism, however. The proactive communication by banks with their clients is at high levels we’ve never before seen. The labour market is normalizing. The Bank of Canada is considering removing mortgage interest payments from its inflation measurement.

And interest rates?

Mr. Tal guesses the Bank’s first move to lower interest rates will occur in June 20204. He is anticipating that interest rates will drop to 2.75%-3% which is where we should expect rates to stay for the long term. 2024 and especially 2025 will see strong real estate markets. In particular, the condo market will start to bounce back in 2025.

Will the Bank of Canada lower interest rates? Will they change the way they measure inflation? How much of what Mr. Tal predicted will bear out? 

Time will tell. I’ll certainly be keeping a close watch.