Our agents were at the most recent Canadian RE/MAX Conference last week, where we had the privilege of listening to a great presentation by CIBC’s Chief economist, Benjamin Tal. Here’s the scoop on what he had to say.

It’s currently the first week of Q4 2024: What is happening with inflation and interest rates at the Bank of Canada is relevant to what’s affecting the real estate markets in locales all over Canada, including Whistler, Squamish, and Pemberton. 

The Pandemic Story of Inflation

During the pandemic, we saw an increase in demand in some sectors of the economy, and an increase in pent up demand (felt in housing as well as other sectors of the economy). We had a decrease in supply across many sectors due to supply chain interruptions (factories shutting down, etc.)  Additionally, because of the mandated shut down of many industries, governments, including our own, supported people financially as they needed. It was no surprise that we would have to pay for the resulting inflation on the other end.

What was surprising: The upswing was dramatic and we expected the downswing to be not necessarily equally dramatic, but dramatic nonetheless. But, in Canada we didn’t see a recession as expected in August. Some may call it a softer landing. 

Why? In Canada, there were 3 main reasons for this softer landing (and also, a longer than anticipated wait for those Bank of Canada interest rates to come down.)  Firstly, 1.2 million newcomers to Canada buoyed the economy. New people kept the demand for goods higher during this time of tightening. Secondly, Canadians amassed $165 billion in savings during the pandemic. Thirdly, the way our mortgages work make mortgage lending less risky for banks and help keep those home mortgage rates lower (think “more manageable”) than our US counterparts. 

Only now, once Canadians have spent through their savings over that last 18 months and moved on to using their credit cards more, have the Bank of Canada interest rate increases had the most desired effect of curbing that demand. At the same time, many disinflationary forces have already come into play thanks to those earlier rate increases, making for this softer landing. 

The big question on everyone’s minds is: The Bank of Canada – Will they, won’t they raise rates again on October 25th? 

The Bank of Canada and Interest Rates: What’s Next?

The Bank of Canada (BOC) is set to make a decision on interest rates on October 25. While many are eagerly awaiting this announcement, it’s essential to understand that in the grand scheme of things, one decision might not drastically alter our economic trajectory. The BOC, like all institutions, is run by humans, and humans are biased. There are two primary ways the BOC could err with interest rates: by raising them too high or maintaining them at elevated levels for an extended period. 

The BOC’s Dual Concerns: Recession and Inflation

The BOC is primarily concerned with two significant economic phenomena: recession and inflation. Given a choice, the BOC would always choose a recession over excessive inflation. This stance makes the BOC somewhat hawkish, tending to overshoot its targets with regard to using interest rates as the weapon to control inflation. However, indications suggest we’re nearing the end of this tightening phase.

The Canadian Economic Landscape: A Closer Look

A Recession?

Despite many predictions, Canada did not plunge into a recession. The primary reason? Recall, the influx of 1.2 million people into the country. However, on a per capita basis, we are in a recession, by design. What does that mean? This is exactly what the Bank of Canada wanted. It wanted to essentially curb individual spending (demand) to slow the rate of inflation (the rate at which prices are rising). This took a little longer than expected, as Canadians amassed $165 billion in savings over the pandemic (not traveling, not going to restaurants, not being able to by the things we wanted because of supply issues).  Unfortunately for the consumer, this buffer has now been depleted, with credit card usage on the rise, making consumers more susceptible to the efforts of the BOC.

Additionally, the way our mortgages work in Canada is less risky for financial institutions and less costly for consumers, so while we’ve seen rates rise, we’re not paying nearly as much as Americans for new mortgages right now. This is a stabilizing effect for us.

Inflation: The Canadian Scenario

Inflation is a lagging indicator, and Canada has managed to control it better than its G7 counterparts. This success is largely attributed to the influence of the interest rate increases put in place by the Bank of Canada. Inflation is a rate of change and while grocery prices are still going up, it is important to recognize that they are going up much more slowly than 18 months ago. There are a number of major disinflationary forces at play. 

Major Disinflationary Forces at Play

Commodities

We’ve mentioned this: Supermarket prices might have you believe we’re in an inflationary spiral, but the reality is different. The rate at which prices are increasing is slowing down, indicating a disinflationary trend.

Supply Chain

The supply chain disruptions that plagued industries are gradually normalizing. The US now boasts 20% more truck drivers than pre-pandemic levels, an indication that things are shipping and that our supply chain issues are, depending on the industry (mostly) over. This is leading to a deceleration in the rise in the prices of goods. Retail gross margins, previously inflated due to supply chain issues, are now stabilizing.

Service Inflation and Wages

Service inflation is primarily driven by wages. Current trends suggest that job vacancies are normalizing, and the labour market is returning to its pre-pandemic state. This normalization means weaker labour bargaining power, slower rates of wage increase, a major disinflationary pressure. Wages are stabilizing, and with that, there is only a certain maximum that people can pay for housing and rent. Which leads to our next topic.

Housing and Its Impact on Inflation

Shelter Inflation

Shelter inflation, or the contribution of the housing market to overall inflation, is calculated differently in Canada compared to the US. In Canada, we include the mortgage interest payments in our calculation when determining housing and shelter inflation. This may seem counterintuitive as with the rising interest rates intended to CURB inflation, this calculation clearly shows that housing costs are rising (and rising quickly) DUE to the increased interest rates. However, when we take out the interest rate effect on the increase of housing costs, we can see that nationwide, housing inflation stands at 2%, which is exactly what the BOC wants. Their rates are having an effect – the increase in the interest rates has forced the price growth of housing costs in general to slow. 

The Bond Market’s Influence

The US bond market plays a pivotal role in influencing Canadian interest rates. With rents on new units in the US easing and US rents constituting a whopping 40% of core inflation, there’s a downward pressure on the bond market, which in turn affects Canadian mortgage rates. How? Bonds are lower risk than mortgages. Because they are lower risk, the interest on bonds is lower than on mortgages. Put simply: Mortgage rates can’t be below bond rates – the banks won’t tolerate that risk profile, and the yields from mortgage backed securities must be more attractive to investors to warrant the additional risk. SO, with the bond market coming down, there is the possibility to ease mortgage rates.

Predictions and the Road Ahead

The BOC’s Future Moves

While it’s challenging to predict the BOC’s exact moves due to its hawkish nature, indications suggest a potential rate cut around mid-2024 (9 months from now). Why longer than expected? The BOC will absolutely make sure it has killed runaway inflation before it allows interest rates to come down. We’ve already explained how the expected recessions didn’t happen due to the influx of new Canadians  and the savings that Canadians accumulated over the pandemic. 

The Real Estate Outlook

Once these interest rates come down again, we have another challenge in real estate. The real estate sector is poised for robust growth over the next decade, primarily due to a significant mismatch between supply and demand. Addressing supply issues is crucial to prevent potential civil unrest and anti-immigration sentiments. With supply chain issues (mostly) resolved and in some industries well on the way to resolving, what we lack is skilled labourers to build new housing. Currently, we also lack the ability to cost effectively finance new builds, but that should ease within the next 9 to 12 months as the interest rates come down. Short Term: It’s possible that the Bank of Canada will raise rates a quarter point in October to quash this round of inflation. Medium term: Rates are likely to start coming down by the end of Q2 2024. (Nine months or so from now). Long Term: The housing supply (and larger labour) shortage will continue to drive up housing prices in the long run.

Conclusion

The Canadian economic landscape, influenced by various factors like the BOC’s decisions, inflation rates, and the housing market, is evolving. As sophisticated real estate buyers and property owners in Whistler, Squamish, and Pemberton, BC, staying informed and understanding these nuances is crucial to making sound investment decisions. Because of the lack of supply, the pent up demand of people waiting until interest rates come down to make their real estate moves, and the desirability of our area, we predict another wave of buyers competing for properties in our markets as soon as the interest rates start to come down. Call your favourite RE/MAX Sea to Sky Real Estate agent if you need help. We know lots of professionals in this industry who can lend a hand.