Canada facing affordability crisis in housing

After inflation rose in April for the first time since peaking in June last year, the likelihood of the Bank of Canada raising interest rates this summer has risen notably, CIBC’s deputy chief economist says.

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But that would be a mistake, according to Benjamin Tal, and the beginning of central bank overshooting.

“Every economic recession, in my opinion, was helped, if not caused, by monetary policy error in which central bankers raised interest rates way too much and killed the economy,” he said. 

“Our call is for the Bank of Canada to stop where it is now, but I admit that the risk of the Bank of Canada raising again has risen dramatically since mid-May.”

The Bank of Canada released its latest financial system review on Thursday and governor Tiff Macklem said he has no plans to cut rates any time soon, even considering the risks associated with household debt.

“Nobody should expect that interest rates are going to go back down to the very low levels that we’ve seen over the last decade or so,” Macklem said.

One of the reasons the central bank may be looking to tighten further is the housing market, Tal said. While it slowed dramatically in the last year, the residential real estate market is picking up again.

“We have seen some increase in prices lately, and that’s premature. That’s too early for the Bank of Canada,” Tal said.

“They want to see more pain not only in the housing market but also in the labour market, and we are not seeing it yet.”

Tal said the housing market is asymmetrical, with prices protected due to lack of supply. In Toronto, less expensive properties are selling quickly, but those asking more than $1.5 million aren’t moving at all. Tal said the likelihood of that changing anytime soon is low. 

“Maybe this stabilization in the market is premature, but it’s clearly a positive signal,” Tal said.

But any slowdown will be a blip, he said, as high immigration numbers mean demand will return, especially in the rental market.

“We need to wake up,” Tal said. “This is an affordability crisis that we are facing.”

“I think that the next elections will be fought over housing, and I think that politicians are starting to realize that.”

Tal predicts prices to start rising over the next six months to a year for relatively affordable units, while stabilizing for more expensive units and continuing to decline for extremely expensive units. 

Governments at all levels are starting to realize that the issue is a lack of supply, Tal said, although they are not moving fast enough. He said incentives are needed for purpose-built rentals, such as apartment buildings.

“We have to change the way we think about renting, and the only way to do it is to provide high-quality rental apartments,” he said.

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