It's no secret that 2022 has been a turbulent year in the real estate market. The past year has seen a wave of changes due to the Bank of Canada's interest rate hikes. But there is always light at the end of the tunnel, and as we look forward to the year ahead, let's take a deeper dive into 2022.
We recently attended the PMA CIBC Summit Series Season Finale, “A Year in Review." In this Summit Series, a panel of industry experts explored the current market trends and discussed forecasts for 2023.
This episode's guest speakers included:
- Benjamin Tal, Managing Director and Deputy Chief Economist at CIBC World Markets Inc.
- Andrew Brethour, Executive Chairman, PMA Brethour Realty Group.
- Lianne McOuat, Vice President of McOuat Partnership.
Using their deep understanding of the industry, they examined current conditions, predicted the market trajectory, and shared insight on how to navigate the murky waters of real estate.
Lianne McOuat shared a first-class presentation on the new home and development market, giving tips and tricks for developers building and selling in today's climate.
2022's Silver Lining
Next, Andrew Brethour shared his market update, during which he stated that despite the growing concerns, he sees a lot of the new changes as good news. “Canada appears to be taking its foot off the accelerator slightly,” he noted. On October 26, the Bank of Canada (BOC) announced an increase of 50 basis points when 75 or 100 basis points were anticipated. “Some remarkable trend lines [are] unfolding.” Brethour believes that we can expect more modest movement of rates going forward. The BOC raised the rate by 50 basis points again on December 7, but Brethour stated Q1 2023 rate decision on January 25 will be less harsh.
“If in fact we get some stability of rate change, the market will adjust to that.”
The recent increases are the fastest we have seen in decades. For millennials, they are the highest levels they have seen since the early 2000s. However, in the 1990s, the average three-year rate was 11.75%. “It's not so much the level but the stability,” Brethour commented. “The stability of rate over time will cause an adjustment in the consumer and that’s I think upon us.” The resale market has seen four months of stability from July to October. The number of sales, listings, and prices have been almost identical. As stability is key for consumers to feel more comfortable and reenter the market, he called this trend line “a very positive one in our industry.”
The Market Will Only Get Hotter
Brethour also touched upon Canada's housing shortage in the face of the country's rising immigration rates. In November of this year, the government of Canada announced that they will be increasing the number of incoming immigrants a year to 500,000 by 2025. From 2023 to 2025, Canada will welcome over 1.4 million immigrants, all of whom will need housing and many of whom will choose to settle in the GTA. Moreover, Canada hosts hundreds of thousands of international students, strongly increasing the demand for rental units. Looking at these statistics, Brethour stated that Canada's real estate market, especially in Toronto and the GTA, will only get hotter.
The Housing Market: A Narrative of Inflation
Benjamin Tal began his speech with the words, “If you want to know about where the housing market is going, you have to have a narrative about inflation.” He continued by stating that it is not truly a story about inflation, but rather about the cost of bringing inflation down to 2%. When presented with the options of inflation and recession, Tal stated that the BOC will always choose recession as the less evil. Further, rather than focus on the inflation rate, they are fighting to keep inflation expectations down.
To support the Canadian economy, the BOC must be very militant when raising or lowering the interest rate. Tal called the BOC’s decision only to increase the rate by 50 basis points when the market gave them the green light to go 75 “an act of bravery,” and suggested that this move means that they are trying not to overshoot. “We know that every housing market crash, every economic recession was helped, if not caused, by a monetary policy error in which central bankers raised interest rates way too much.” This is because inflation is a lagging indicator. It often peaks six months after the beginning of a recession. Often national banks raise interest rates without results, raise it again, and then overshoot. Despite this, it's hard not to keep increasing interest rates as inflation goes up. Therefore, the BOC will start taking baby steps toward increasing interest rates rather than stopping altogether.
Tal noted that there are always two sources of inflation, demand and supply. In cases when inflation stems from the economy's supply side, there is nothing that the BOC can do. Yet there is good news. The share of inflation coming from supply is decreasing because of significant improvements in the supply chain. Trade activity has almost gone back to pre-pandemic levels, and shipping costs have decreased dramatically. This means that the BOC is more effective in curbing inflation and their risk of overshooting is considerably lower.
“I am very optimistic about the ability of the Bank of Canada and the global economy to reduce inflation to about 4-3.5% relatively quickly over the next few quarters, and then we will see what Canada can do in terms of rising interest rates,” said Tal.
Tomorrow's Job Market
Tal mentioned that while wages have been on the rise, they have not kept up with rising prices as expectations have not been rising. Additionally, there is now an interesting imbalance in the job market. The majority of those entering the employment market since the start of Covid are university-educated individuals expecting high pay, while those exiting the job market held low-paying, low-education jobs. This discrepancy has contributed significantly to the 1 million job vacancies Canada is now experiencing, causing a need to raise wages. However, the small businesses that employ most of the low-education workers cannot afford it. Thus, wages in the lower section of the employment market are still relatively subdued given the shortage of labour.
The hope, stated Tal, is that the recession we are going into will not be a true recession. Rather, the damage to the labour market will not be significant. The economy will be shedding vacancies as opposed to jobs, causing the unemployment rate to only rise to 6-6.5%. This will help the Bank of Canada fight this inflation with relatively little damage.
What We Can Expect in the Year to Come
Tal announced that the Bank of Canada will limit interest rate hikes now that it has reached 4.25%. He believes that rates will start decreasing no sooner than late 2023 or early 2024. This is because the BOC must ensure that they have completely killed our inflation issues before beginning to cut interest rates. For example, the double-dip recession in the 1980s occurred because the authorities lowered interest rates prematurely and caused another wave of inflation, triggering a recession. When cutting interest rates, Tal noted that the BOC will likely reach 3-2.75%, higher than the 1.75 overnight rate we had at the start of this process. This is because there are more sources of inflation in the current market, including deglobalization, just-in-case inventory replacing just-in-time inventory, and a labour market that is not cheap and available. Despite these inflationary forces, the target of the BOC remains to keep inflation at 2%. Thus, interest rates must be higher to reach this target.
In this environment, Tal assured that the housing market can do fine. The first correction in the housing market is that supply is not rising. In fact, it's down. People are waiting to see when the fog will clear in order to sell. The lack of new listings is protecting the market.
During Covid, prices increased significantly. Homebuyers got the benefit of a recession with extremely low-interest rates without the cost of a recession, such as a high unemployment rate. Now, the housing market has cooled down. Tal noted, “The correction we are seeing is a good thing, this is not a meltdown. This is not even a correction in the full meaning of the word. It is a relocation of the activity of time. That’s the way to look at the situation . . . Now interest rates are helping you to rest. To me, that is very healthy.”
Tal stated that now the big question is what will happen to supply as time goes on. We might soon see stress sales. Tal estimated that roughly 22% of mortgages are now reaching a trigger rate in which they are basically all interest. Only 3% of this total are selling, while 10% are even accelerating payments. Therefore, Tal believes stress sales will not greatly affect the market's trajectory. However, he said that they will keep prices from rising anytime soon. “Spring will be okay, but not great.”
“I can tell you that the fact that sales are stable and prices are stable now is amazing, tells you how strong this market is, how strong the fundamentals are,” commented Tal. Demand for Canadian housing remands strong and supply will continue to be a major issue. “We are now going through a reset period, but it doesn’t mean this market is weak. This market is extremely strong and we know, unfortunately, that a lot of projects are being cancelled or delayed because of the cost of construction and higher interest rates, especially purpose-built rental being delayed, cancelled in a very significant way.”
The Canadian housing market has repeatedly proven itself as a surefire source of investment returns. The demand for housing is only getting stronger, and supply is barely catching up, ensuring a hot market for years to come. Considering these favourable conditions and Canada's more relaxed interest rate hikes, it is clear that now is the time to invest.
To learn more about the GTA’s real estate conditions, click on the link below.