Inflation and the Canadian real estate market in 2023 compared with the 70s and 80s
If you are over the age of 55, today's economic scene in Canada may strike a chord. You may have bought your first home in the 1980s during a period of skyrocketing interest rates, and today's market might feel very similar. The key overnight lending rate has risen eight times in the past twelve months due to ongoing pandemic inflation, and it now sits at 4.5%. Rates may even rise again on March 8 when the Bank of Canada makes its next official announcement.
We understand your trepidation. But hear us out. While today's scene has some striking similarities to that of the 70s and 80s, it is also quite different.
According to a report published in April 2022 by James Orlando, CFA, Director + Senior Economist with TD Bank, interest rates rose so high in the 1980s because inflation wasn't dealt with soon enough. Today, the Central Bank's approach to inflation has changed, and positive news is appearing in our economy regarding employment.
Will 2024's economy be much better than the present? We don't have a crystal ball, but we're willing to be optimistic.
Here is how today's economy compares to history and what the experts say is actually happening in Canada.This is our way of helping you make informed decisions about real estate investing for a profitable tomorrow.
What caused rampant inflation in the 1970s?
Orlando details the two main causes of runaway inflation in Canada during the 70s and 80s in his April 2022 report, Canadian Inflation: A New Vintage. In the 70s and 80s, bad weather and war led to large increases in food and energy prices. Bad weather affected farmers in 1973 so strongly that a global food shortage occurred, and food prices skyrocketed by 18.4%. Droughts in several parts of the world led to many things, including lower-than-average grain production in China and Australia, as well as historically low fishmeal production, lower poultry production in the US, and meat shortages in Western Europe, the former Soviet Union, and Australia.
At the same time, the Iranian Revolution in 1979, followed by the Iran-Iraq war of 1980, caused the price of oil to double. In 1981, gas prices in Canada rose by 45.5%. This climate contributed to the Bank of Canada raising interest rates to 21% causing mortgage interest payments to soar. Not surprisingly, the Canadian economy fell into a recession.
What's happening in Canada's economy today?
This doomsday scenario is what it seems many fear could happen now. Orlando says housing, gas prices, and food are behind almost 80% of Canada's current inflation, fostering a similar scene.
According to Statistics Canada, the annual average Consumer Price Index (CPI) rose 6.8% in 2022, marking a 40-year high. This was the largest increase the country has seen since 1982. So, yes, you could say we might be on the brink of something big. However, we still have a long way to go before reaching 1981's peak of 12.9% inflation.
According to Bank of Canada deputy governor Toni Gravelle, comparing inflation during the 1970s in Canada to our current environment is “unjustified”.
As TD chief economist Beata Caranci has pointed out, there are so many differences worldwide when we reach that far back in history. Comparing the two periods is challenging. This being said, it’s tempting to do. A good look at what is now going on in Canada will also show marked differences in our economy that present key positives.
The rate of inflation in Canada is actually finally going down
In December 2022, inflation actually slowed to 6.3%. According to Statistics Canada, this was due to a gasoline price decrease. The average price for gas across the country is now just slightly higher than it was about a year ago before Russia invaded Ukraine.
Employment is going up
In addition, employment is trending upward. In December 2022, Stats Can reported the country added 104,000 more jobs, shockingly.
"It was an absolutely massive surprise," Royce Mendes, managing director and head of macro strategy at Desjardins, said to CBC News. The number of jobs added, Mendes said, was over 20 times more than predicted. Economists expected about 5,000 jobs to be added, and this new number blew well past the gates. As a result, the unemployment rate fell to 5.0%, a change that has been attributed to an increase in full-time work.
Today, the Central Bank has a different approach to inflation
Another key difference economists cite between the 70s and 80s and now is the Central Bank's current approach to controlling inflation. Stephen Williamson, an economics professor at Western University who spoke with the Canadian Press, said that in the 1970s, inflation control wasn't considered the responsibility of the Bank of Canada. Now, in contrast, it is.
Williamson said for much of the 20th century, central banks hadn’t yet developed effective mandates for controlling inflation. Attempts to do so were made through the money supply, but this didn't quite work. Inflation control was approached this way because central banks didn't want to risk hampering economic growth by implementing higher interest rates. James Orlando of TD has said this resulted in the Bank of Canada being too slow to raise interest rates in the 70s and 80s, and by the time they did, it was too late, causing rates to rise as high as they did in 1981.
It wasn't until 1982 that the Bank of Canada stopped targeting the money supply to tackle inflation. Finally, in 1991, an inflation-controlled framework was implemented to guide monetary policy. This was agreed upon by the Bank of Canada and the minister of finance, and while it may not be perfect or foolproof, this adds a layer of protection to fighting inflation today that our economy didn't have decades ago.
“We believe the Bank of Canada has learned from history,” Orlando wrote in his comparison report.
Central banks worldwide have successfully targeted inflation since the 1990s, he added, and continue to be committed to reining it back in.
Yes, it's true we can't tell what may be around the corner for the Canadian economy, yet we can arguably say that today's economic climate is quite different from that of the past.
What is expected to happen with interest rates in 2023/2024
Interest rates in Canada are predicted to possibly rise again in March 2023 and then hold steady throughout the remainder of the year. In a long-range outlook, rates are predicted by Desjardins economists to be cut to 3.75% by the end of the fourth quarter of 2023. We might even go as low as 2.5% by the culmination of 2024, but this remains to be seen. Global circumstances are pushing food and energy prices up, but inflation isn't expected to reach the heights of the 70s and 80s or to be as persistent.
Canada will continue to have a strong demand for new housing as millions of newcomers are welcomed to the country in the coming decades.
The best time to invest in real estate is now. At GTA-Homes, our team is committed to providing our clients with the best information about the preconstruction condo market. We want to help you create lucrative avenues for income generation and help provide homes for Canada's future generations. Be part of exciting change and contact us now to get started as an investor.