Message from the President – Here we go again: Turbulence in the Canadian Economy – part 1 of 3

Published On: 25 May 2022Categories: Dorr Insider ReportTags:

Lately, there has been a lot of chatter about several new macroeconomic forces at play, and one word sums up what happened in markets the last quarter – turbulence. There were headlines aplenty, whether it be in the stock market, the bond market, the housing market, interest rates, or inflation. Because of this, I felt it essential to address a few issues in the Canadian economy, give you an update, and let you know what we expect throughout the rest of the year and beyond.

Let’s start with the macro environment of the Canadian economy and how it is changing. After slashing interest rates to barely above zero in March 2020 in response to a pandemic, the Bank of Canada recently hiked its benchmark interest rate by 50 bps to a 1% target. This was in a (delayed) response to combat runaway inflation, at 6.7%, its highest level in 31 years. The rate hikes aren’t done either, and many are concerned about what that means for real estate going forward.

On the one hand, higher interest rates should have an impact on the economy, slowing it down to tame inflation. We’ve seen this response in the stock markets in North America, with selloffs happening as inflation and interest rate expectations move higher with every report. On the other hand, the economy is growing fast, with demand outpacing supply, resulting in said inflation. In addition, real estate has historically been an excellent inflation hedge.

Where does that leave us? Many experts agree on one thing – they don’t know. However, there are things we do know. The Canadian real estate sector is robust over the long run and has historically performed well in times of rising inflation and rising interest rates. Long-term affordability in real estate is undoubtedly a problem that needs to be addressed, whether it be by increasing supply or financial engineering. Still, there are secular forces that have been driving real estate prices higher for decades. Those do not reverse overnight.

Will the rising interest rate environment bring about a recession, as it has many times in the past? Likely. Will that lead to a crash in the short run? Maybe. As owners try to get in before rate hikes, will we see a boom period? Possibly. What we do know is that over the long term, even a recession has had a hard time knocking real estate prices much lower, and over longer periods, the trend has been from the bottom left to the upper right.

I don’t think we’ve ever been in a period where this many significant events – a War in Europe, multi-decade high inflation, supply chain woes, shortage of housing in Canada, and rising interest rates – are happening simultaneously. We’re probably going to see a recession, but it’s more likely to be a good thing where the economy resets and becomes more efficient rather than a prolonged downturn.

With so much pent-up demand for real estate, I believe a pullback would be short-lived, and the more likely situation is that we are in for more strong years ahead. We’re excited and optimistic about the long-term future.

The next two newsletters will provide a deeper dive into these factors affecting our markets.

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