While Canada’s inflation concerns have largely subsided, the country’s housing market is in crisis, says Benjamin Tal, deputy chief economist with CIBC.
Inflation was “stickier than expected” earlier this year, Tal said, but that is no longer the case.
“At this point, inflation is really not an issue anymore — no question about it,” he said in a recent interview. In fact, excluding mortgage interest payments, which account for one-third of inflation, Tal said inflation is down to around 1%.
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He expects the Bank of Canada to continue cutting interest rates late into next year, with rates at 2.25% to 2.5% by the end of 2025 — a significant decline from the current 4.25%.
While lower rates will help the economy, Tal said they won’t solve the number one issue in the housing market: affordability.
“Affordability is a major crisis, and I’m not using this word lightly,” he said.
The solution lies in increasing the pace of home construction across all regions.
“Demand is strong enough, especially with interest rates going down,” he said. “We need much more supply. That’s the story.”
The supply of purpose-built rentals — apartments — shows signs of improvement, given government initiatives such as removing the HST and GST on new projects, Tal said. And governments continue to look for ways to reduce costs and increase affordability in that market.
Tal acknowledged the federal government’s recent efforts to expand mortgage insurance and extend amortization periods but warned these are “just a temporary fix.” The measures boost demand and fail to tackle the bigger problem of increasing housing supply.
To increase supply, governments could explore innovative approaches to construction, such as factory-made homes and 3D printing. In Sweden, 80% of homes are factory-made, he noted.
“We are still building houses the way we built 50 years ago,” Tal said.
Another supply-side solution is to provide incentives to developers of purpose-built rentals, he said.
Now is a “golden opportunity” for policymakers to tackle the housing crisis head-on, Tal said: “Governments at all levels are panicking about housing,” because housing affordability is a key issue in upcoming elections.
As such, “for the first time, we see a situation in which all levels of government are eager to solve the issue” of supply, he said.
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