I had the pleasure of speaking at and attending our lenders group conference last week, where Ryan McLaughlin from BCREA provided an insightful overview of the current economic landscape. Here are my key takeaways:
State of the Macroeconomy:
• Last spring, the economy was cooling and sinking.
• Now, rates are dropping for the first time in 4 years.
Inflation and Recession:
• Historically, bringing down inflation without causing a recession was challenging.
• Achieved a soft landing, reducing inflation without triggering a recession.
• Inflation is drifting down to 2%, with a current YoY rate of 2.7%.
Components of Inflation:
• Non-shelter inflation is under control.
• Shelter costs remain high, driven by rising rents and mortgage costs.
• Central Bank interest rates don’t effectively manage shelter inflation.
• Need more housing supply to control rent increases.
Core Inflation and Labour Market:
• Core inflation has been trending down to 2% over the past three months.
• Labour market is softening but remains strong, with near-normal unemployment rates (~6%).
• Tight labour markets are closely linked to inflation dynamics.
GDP and Population Growth:
• GDP has been flat over 2023-2024, prompting rate cuts by the Central Bank.
• Net international migration is historically high, significantly impacting housing and rent dynamics.
• GDP per capita has plateaued, with Canada lagging behind the US.
Housing Market and Affordability:
• Average housing prices have plateaued, with some regional variations.
• BoC rates have been priced in, but mortgage rates have fluctuated recently.
• Market tightness persists due to demographic shifts and unwillingness to sell.
• Affordability for young people is at its worst in 40 years, with high income-to-household cost ratios.
Policy and Supply Issues:
• Various measures to improve affordability have had limited success.
• Supply is a critical issue, highlighted in political discourse.
• Potential solutions include dropping GST on new rentals, new building types, and updated zoning regulations.
• Example from Auckland vs. Wellington shows increased supply can stabilize rents.
• Workforce issues in construction hinder housing development.
• Coordination needed across municipal, provincial, and federal levels to address housing affordability and supply.
These insights underscore the complex interplay between economic policies, market dynamics, and housing challenges. Addressing these issues will require collaborative efforts across all sectors and levels of government.
