Canadian economist Benjamin Tal’s presentation at the National Mortgage Brokers Conference was eye-opening. In it, he posited a holistic view of what’s happening with the Canadian economy and what we can expect to happen next. He’s rarely been wrong in the 20 years I’ve been following him – so I thought it was incredibly important to share his insights with you.
Part 1 of this series dives into the forces he believes are impacting inflation. These include international economies as well as lasting effects from the pandemic. There’s one factor however that I believe is most responsible for our current economic climate and is worthy of a larger conversation: the labour market.
Where Are All The Workers?
There are currently 1 million vacant jobs in Canada. Considering our relatively smaller population of 38 million, this is a huge number. So what’s stopping these positions from getting filled? To start, a shocking amount of people are battling long COVID. While the stats in Canada aren’t exactly clear, we know that 16 million people in the United States are off work for this reason.
What about everyone else? If you look at the numbers, most of the job vacancies are low-paying jobs. Tons of these jobs were left empty over the pandemic by people who felt vulnerable – so they learned new skills or took on new careers. And fair enough. After 2+ of not working, or not working consistently, these Canadians felt like they deserved more.
As a result, wages for the jobs they left skyrocketed in attempts to refill them. This narrowed the margins of corporations and left them with crippling operational challenges.
How Immigration Plays A Part
In 2020, the federal government said that we need 400,000 immigrants to fill job vacancies. Since then, 400,000 immigrants have come to Canada and done exactly that. Problem solved, right? Not exactly. It’s too simplistic to look at the influx of newcomers against total job vacancies. To really understand our economy, you need to look at the kinds of jobs newcomers are filling.
Therein lies the problem: too few of these jobs were in areas that require high-skilled workers. We need people to take on jobs in construction to combat our housing shortage, and nursing to fill huge shortages. Immigrants are flowing in; but they aren’t taking on the kinds of roles that can accelerate our economy. Here’s a tip: send your kids to trade school and they’ll automatically get a great job with great incomes right out of the gate.
The Rental Market
It’s impossible to talk about inflation without talking about rising rents. A large cohort of immigrants is fantastic for many reasons, but it’s undeniable that it puts a strain on our rental market. In the first six months of 2022, Canada had 270,000 new immigrants, followed by another 200,000 from Ukraine. This increased demand for housing has netted sky high rents all over the country – and it doesn’t look like these numbers will come down any time soon. Rising rents factor into the consumer price index (CPI) and contribute to rising inflation.
The Housing Market
Benjamin believes that we’re witnessing a correction, not a crash. I must say I agree. House prices went up 46% over 2 years, so they were probably due for a little bit of cool down. There is no doubt in my mind that the housing market is set to rebound big time in the long term.
One reason for that is inventory. Due to wage inflation and the rising cost of materials, construction has never been more expensive. The government wants to double home construction in 10 years, but that’s just not going to happen. One third of new construction in the GTA is being delayed or cancelled because these projects just aren’t viable. Nobody wants to get in the business of losing money – so developers are going after other markets.
Another reason is immigration. If rent is high and the cost to buy is low, it will be a no-brainer for new Canadians to get into the market. Demand will begin to far outweigh supply as more and more immigrants flood into the country. For these reasons, inventory will shrink and home prices will start to shoot back up.
The latest announcement from the Bank of Canada hadn’t been released when I saw Benjamin speak. However, he did mention that a Bank of Canada rate of over 3.75% would be overshooting. Surprise surprise – the overnight rate shot up to 3.75% bringing the prime rate to 5.95%. According to Benjamin (any myself) there’s no need for further hikes. We are in a recession now. Any further rate increase will undoubtedly create a worse economic climate than necessary.
With that said, Benjamin expects interest rates to come down in 2024. We won’t see rates as low as 1.75% like we did before the pandemic, but we will see them level out around 2.75%, settling the prime rate at 4.95%. If you’re looking to buy an investment property, this is still a good time to do so. If you’re looking to buy a home, whether it’s your first home or second home, house prices could come down a little – but don’t expect for the market to collapse.
The Bottom Line
We’re currently in a transitional era. During times like these, it’s important to consult a professional before making a major financial decision. You may not be able to pick up the phone and call Benjamin Tal – but you can always call me.
***Thanks as always to Benjamin Tal for his brilliance and generosity with this information.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis: 416-224-0114; email@example.com