Interest-sensitive sectors like housing and utilities are underperforming relative to their potential, with certain pockets of housing “basically in a recession,” says Benjamin Tal, deputy chief economist at CIBC.
As a result, the economy requires lower interest rates, he said in a Sept. 16 interview.
“We expect the overnight rate — the Bank of Canada rate — to go down to about 2%, or maybe even 1.75% before they call it a day,” Tal said.
Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.
While housing isn’t technically in a bubble, he said there is definitely an affordability crisis, with many young Canadians simply unable to buy a house.
Economic policies and incentives are necessary to stimulate activity and rental demand, he said. This includes reducing development charges so builders can build more, and cutting GST to unlock short-term demand. Tal said he expects the government will take these steps in the upcoming budget.
“In addition, we have to allow CMHC (Canada Mortgage and Housing Corp.) to lend more to developers,” he said. “What they are doing now is simply not enough.”
Tal said Canada’s housing market is fragmented. There’s no single national story. Alberta is “doing fine,” and Eastern and Atlantic Canada are “doing wonderfully,” especially in housing starts. But markets like Toronto and Vancouver are in a recession, particularly in the condo sector. Resale prices in these markets are down by 20%, and will decline a further 5% to 7%, he said.
“Many investors that accounted for about 60% to 70% of the market are now out of the market, and we have a situation in which builders are not building because the cost of building is very expensive,” he said.
As a result, inventory will decline over the next two years driven by continued — though slowing — immigration demand. And Tal said prices will have to rise to reflect the growing supply gap, adding that he expects these markets to stabilize by 2026 or 2027.
Looking to the economy as a whole, GDP remains at 0%, unemployment is rising, business investment is negative and uncertainty surrounding U.S. economic policy is a major factor that’s disrupting consumer confidence and behaviour, Tal said. These factors further support the case for the Bank of Canada to lower rates, particularly now with inflation under control.
“So the overall story, we are okay, but being okay is not enough in this environment,” he said. “We have to stimulate activity and for that, we need lower interest rates.”
This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.