Peeking Ahead: Real Estate Investing in 2023 and Beyond
Undoubtedly, the real estate market experienced some turbulence in 2022. The Bank of Canada’s interest rate increases over the past year have caused a wave of changes. As we look forward to the coming year, let’s take a closer look at 2022. However, there is always light at the end of the tunnel.
We recently went to the “A Year in Review” PMA CIBC Summit Series Season Finale. In this Summit Series, a panel of business experts examined current market trends and discussed projections for 2023.
The special guests on this episode were:.
- Benjamin Tal is CIBC World Markets Inc.’s Managing Director and Deputy Chief Economist.
- Andrew Brethour, Executive Chairman of the PMA Brethour Realty Group.
- Lianne McOuat is the vice president of McOuat Partnership.
They assessed the situation today, forecast the market’s future course, and provided advice on how to negotiate the complex real estate market using their in-depth knowledge of the sector.
Lianne McOuat gave a top-notch presentation on the new home and development market, offering advice for developers looking to build and sell in the current environment.
2022’s Silver Lining
Following that, Andrew Brethour gave a market update during which he said that he views many of the recent changes as positive even though there are growing concerns. He said that Canada seemed to be easing up on the gas a little. The Bank of Canada (BOC) announced a 50 basis point increase on October 26 when 75 or 100 basis points were anticipated. “A few striking trend lines are developing. In the future, Brethour predicts that rates will move more subtly. On December 7, the BOC increased the rate once more by 50 basis points, but Brethour predicted that the rate decision for Q1 2023 on January 25 would be less harsh.
“The market will adjust if we actually experience some rate change stability. “.
The most recent increases have been the fastest in decades. They are at their highest points for millennials since the early 2000s. The average three-year rate was 11.75 percent during the 1990s, though. Brethour remarked that stability rather than level was more important. “The consumer will adjust as a result of the rate’s stability over time, and I believe that this is already happening. From July to October, there were four stable months for the resale market. There have been nearly identical amounts of sales, listings, and prices. He referred to this trend line as “a very positive one in our industry” because stability is essential for consumers to feel more at ease and reenter the market. “.
The Market Will Only Get Hotter
In light of Canada’s rising immigration rates, Brethour also discussed the country’s housing shortage. By 2025, there will be 500,000 new immigrants arriving annually, the Canadian government announced in November of this year. Over 1 point 4 million immigrants will come to Canada between 2023 and 2025, and most of them will choose to settle in the GTA. They will all need housing. Thousands of foreign students are also housed in Canada, which significantly raises the demand for rental housing. Brethour predicted that the real estate market in Canada, particularly in Toronto and the Greater Toronto Area, will continue to heat up in light of these figures.
The Housing Market: A Narrative of Inflation
When he started speaking, Benjamin Tal said, “If you want to know about where the housing market is going, you have to have a narrative about inflation. He continued, saying, “It’s not really a story about inflation; it’s about the cost of getting inflation down to 2%. The BOC will always choose recession as the less bad option when given the choice between inflation and recession, according to Tal. And they are working to keep inflation expectations low rather than concentrating on the inflation rate.
The BOC must be aggressive when raising or lowering interest rates in order to support the Canadian economy. Tal praised the BOC for exercising “bravery” by only raising the interest rate by 50 basis points when the market had approved a 75-basis-point increase, and he hypothesized that this action indicates the BOC is attempting to avoid overshooting. “We know that every housing market crash and every economic recession were aided, if not caused, by a monetary policy mistake where central bankers raised interest rates way too much. This is due to the fact that inflation is a lagging indicator. It frequently reaches its peak six months after a recession starts. National banks frequently increase interest rates without seeing any change, then increase them again and overshoot. Despite this, as inflation rises, it is difficult to avoid raising interest rates. As a result, the BOC will begin gradually raising interest rates rather than coming to a complete halt.
Demand and supply, according to Tal, are the two main causes of inflation. The BOC has no power to intervene when inflation is caused by supply-side economic factors. There is, however, good news. Since the supply chain has undergone significant improvements, the portion of inflation caused by supply has decreased. Nearly all pre-pandemic levels of trade activity have been reached, and shipping costs have dropped significantly. As a result, the BOC’s ability to control inflation is improved, and their risk of overshooting is significantly reduced.
We will then see what Canada can do in terms of raising interest rates. “I am very optimistic about the ability of the Bank of Canada and the global economy to reduce inflation to about 4-3.5 percent relatively quickly over the next few quarters,” said Tal.
Future Employment Market.
While wages have increased, Tal noted that they have not kept pace with rising prices because expectations have not increased. The job market has also developed an intriguing imbalance. Since the launch of Covid, the majority of people entering the workforce have a college degree and expect a high salary, while those leaving the workforce held low-paying, uneducated positions. The 1 million job openings Canada is currently experiencing are largely a result of this disparity, necessitating wage increases. The majority of the workers with low levels of education are employed by small businesses, which cannot, however, afford it. Due to the labor shortage, wages in the lower echelons of the employment market are still relatively low.
The hope, according to Tal, is that the impending recession won’t be a real one. Instead, there won’t be much of a loss for the labor market. The unemployment rate will only increase to 6-6.5% as a result of the economy losing job openings rather than creating new ones. By doing this, the Bank of Canada will be able to combat this inflation with little loss.
What We Can Expect in the Year to Come
Once the interest rate reaches 4 point 25 percent, Tal announced that the Bank of Canada will restrict rate increases. He predicts that rates won’t start dropping until late 2023 or early 2024. This is so that the BOC can begin reducing interest rates only after they have completely eliminated our inflation problems. For instance, the early interest rate cut that led to another wave of inflation and the double-dip recession in the 1980s was brought on by the government. Tal stated that the BOC will probably cut interest rates to 3-2.75 percent, which is higher than the 1.75 overnight rate we had at the beginning of this process. This is due to the fact that the current market has more sources of inflation, such as deglobalization, the substitution of just-in-case inventory for just-in-time inventory, and a labor market that is both expensive and scarce. Despite these forces of inflation, the BOC still wants to keep inflation at 2%. Therefore, higher interest rates are necessary to achieve this goal.
The housing market can thrive in this environment, Tal reassured. The lack of an increase in supply is the cause of the first housing market correction. It’s actually down. In order to sell, people are waiting for the fog to clear. The market is being protected by the lack of new listings.
Prices significantly rose during Covid. Homebuyers benefited from a recession by taking advantage of historically low interest rates without having to pay the price of a recession, such as a high unemployment rate. The real estate market has since stabilized. Tal stated, “The correction we are seeing is a good thing; this is not a meltdown. This doesn’t even constitute a correction in the true sense of the word. The activity of time has been relocated. That is the proper perspective, dot. Now that interest rates are low, you can relax. That seems very healthy to me. ”.
The main concern right now, according to Tal, is what will happen to supply as time goes on. Sales under pressure could occur soon. Tal estimated that roughly 22 percent of mortgages are now reaching a trigger rate in which they are basically all interest. In contrast, 10% even accelerate payments, leaving only 3% of the total engaged in selling. So, according to Tal, the market’s trajectory won’t be significantly impacted by stress sales. He did, however, promise to prevent any further price increases in the near future. Spring will be passable but not outstanding. “.
“I can tell you that the fact that sales and prices are stable right now is amazing, tells you how strong this market is, how strong the fundamentals are,” said Tal. Housing demand in Canada is still high, and supply will remain a significant problem. “This market is not weak, even though we are currently in a reset period. Due to the high cost of construction and higher interest rates, there are a lot of projects that, despite this market’s extreme strength, are being postponed or cancelled entirely. This is especially true for purpose-built rental properties, which are significantly postponed or cancelled. “.
The Canadian housing market has consistently demonstrated its reliability as a source of investment returns. There will be a hot market for homes for years to come because demand is only going to increase and supply is barely keeping up. The time to invest is now given these favorable circumstances and Canada’s more gradual interest rate increases.