The Bank of Canada is widely expected to hold its benchmark interest rate when it meets next week, but a lot has changed since October.

Cooling inflation, here and south of the border, and a weakening economy have turned markets’ attention from rate hikes to rate cuts.

Investors are now fully pricing in a 25 bps rate cut by April, a 75 per cent chance by March and even a 20 per cent chance by next week.

Stephen Brown, deputy chief North American economist for Capital Economics, thinks odds of a cut as early as next week are way off the mark, but also believes markets are underestimating the degree of policy loosening to come in 2024.

Capital expects the Bank will tone down or even drop its tightening bias next week because of developments since its last meeting in October.

Oil prices, a big driver of inflation, have fallen back after a spike over the Israel-Hamas war to below what the Bank forecast in its October monetary policy report. Gas prices are at their lowest since March.

Capital now expects that headline inflation will average 3.1 per cent this quarter compared to the Bank’s forecast of 3.3 per cent.

The economy is also looking weaker than the Bank expected, said Brown. Gross domestic product data out today showed the economy in the third quarter shrank at a 1.1 per cent annualized pace, weaker than the Bank’s forecast of 0.8 per cent.

Other indicators support this. “According to the CFIB Business Barometer, the share of firms suffering from insufficient domestic demand jumped to 44 per cent in October, which implies that GDP is close to 1.5 per cent below its potential,” said Brown.

He also expects that jobs data out tomorrow will show a small rise in unemployment and slowing wage growth, “which should help to soothe the Bank’s lingering fears about wage pressures.”

Despite some tough talk on inflation, Bank of Canada governor Tiff Macklem “has now dangled the prospect of rate cuts a few times,” said Brown.

The governor repeated last week that cuts can begin before inflation falls to the 2 per cent target as long as there is a clear trend that it is headed that way.

Capital estimates that the Bank will need to see this trend for almost six months, making March or April the most likely meetings for cuts to begin.

But while markets expect only 95 bps of cuts over 2024, Capital believes the Bank will need to cut more than twice as much.

“The main reason we disagree with market pricing is that, based on our inflation forecasts, 100 bp of cuts would not be enough to prevent the real stance of policy from becoming more restrictive,” said Brown.

“In other words, the Bank will need to deliver 200 bp of cuts just to prevent monetary policy weighing even further on economic growth.”

One sticking point could be the housing market. While home prices are coming down, the Bank may take a more cautious approach to avoid fuelling another rally.

Yet, the sales-to-new listing ratio recently fell to its lowest since 2013, meaning that home prices could drop even more than the 5 per cent Capital is predicting by March.

“At a time when house price declines are gathering pace, … right now one can just as easily make the opposite argument that the Bank will need to act aggressively to prevent the housing market from falling into a tailspin,” he said.

Consumer credit has slowed to its slowest pace in 30 years, and when adjusted for inflation National Bank economists estimate that it has actually fallen by 1 per cent. The last time household credit fell in Canada it was the great recession of the 1990s, which the prime rate hit 14 per cent and the jobless rate was 12 per cent, said National economist Stéfane Marion.

“There is simply no precedent for a contraction in household credit of the current magnitude, while the unemployment rate remains below 6 per cent,” wrote Marion.

“Let’s hope that the next employment report on Friday doesn’t show too much of a deterioration in hiring, otherwise the credit cycle will continue to deteriorate.”

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Real estate speculation is a national sport in Canada, but it may have gone over the line. The Statistics Canada (Stat Can) Canadian Housing Statistics Program (CHSP) released data showing the share of newly constructed condos owned by investors in 2021. The data reveals that most units are investor owned, amplifying concerns of financialization and ownership concentration. Both issues lead to inefficient markets that aren’t just difficult for the public, but increase vulnerability in the event of an economic downturn. 

Canadian Real Estate Investor Market Share & Commoditization

Canada has seen the rapid financialization of housing, and that can be an issue. “In the context of housing affordability, concerns about financialization and the concentration of ownership in the real estate market have emerged in recent years,” wrote the CHSP, in the accompanying notes with the data.  

Financialization is when housing is treated as a commodity to trade, rather than serving a need. Everything is commoditized to some degree, but the deeper the financialization the less connected the asset becomes to its use. 

In the case of housing, rather than landlords collecting rental yield, they may start trading the homes as speculative properties detached from any value. That can lead to rents that are no longer connected to incomes, resulting in greater social liabilities. Greater social liabilities tend to produce greater corrections. 

Concentration of ownership can also present a concern when it comes to essentials. A greater share of investors that trade based on financialization, the more distorted markets become. When housing is treated as a commodity disconnected from its need, it’s prone to more violent economic corrections. It’s a problem that was prominent during the Golden Age of Colonialism, and it’s popping up again. Once again, the more disconnected the worse the correction.

Most of Canada’s New Condo Supply Is Investor Owned

Most of Canada’s new condos continue to be investor owned, driven by larger provinces. Investors owned most condo units built after 2016 in Ontario (57.3%) and Nova Scotia (58.8%). It wasn’t quite half in BC (49.3%), but it got closer. Most of Canada’s new supply has been delivered in these provinces, meaning it skews ownership across the country. 

Investors Own Most of Canada’s New Condo Supply

The share of condos built after 2016 that are owned by investors.

*CA includes the five provinces with data from the CHSP. They will be gradually adding more provinces in the coming months.

Source: Stat Can; Better Dwelling

Only two of the tracked provinces have seen major declines in the share of investor-ownership. New Brunswick saw the share of investor owned new condos drop 18.7% to 31.3% in 2021. Manitoba wasn’t as extreme, but still saw a big 9.9% decline to 39.4% of new condos.   

Most housing built after 2016 is investor owned, presenting an ownership concentration issue. The issue becomes even more problematic when you consider this is the share of owners that kept the unit as an investment. Virtually all pre-construction is sold to investors in major markets, distorting them even further.

The jury is still out on whether British Columbia's recently announced actions against illegal short-term rentals will have their desired effects, but it's now received a big endorsement from Minister of Finance and Deputy Prime Minister Chrystia Freeland, who says the federal government is following suit.

At a joint press conference with Minister of Innovation, Science, and Industry François-Philippe Champagne and Treasury Board President Anita Anand on Tuesday, Freeland announced that she was designating the Ombudsman for Banking Services and Investments (OBSI) as the single external complaints body for Canada's banking sector.

She then closed her remarks by shouting out British Columbia.

"I also want to quickly address the BC government's new legislation to regulate the short-term rental market," said Freeland. "This is a positive and important step in the right direction, in an area of provincial jurisdiction."

Freeland then said what many governments around the world have said: short-term rentals need to be converted into long-term rentals.

"We know that short-term rentals through sites like Airbnb and Vrbo mean fewer homes for Canadians to rent and live in full-time, especially in urban and populated areas of our country," she said. "That is why our government is actively examining what options and tools exist at the federal level, to ensure more short-term rentals are made available as long-term rentals — as permanent homes — for Canadians to live in."

Freeland concluded by saying that the Government of Canada will have more to announce in the weeks to come.

The War On Short-Term Rentals

A day prior to Freeland's comments, the Province of British Columbia announced the Short-Term Rental Accommodations Act, which included a suite of actions such as creating a provincial registry for platforms and hosts, increasing fines for infractions, and requiring platforms to share more data.

With the announcement, BC joined a growing list of governments around North America that are cracking down on short-term rentals in the name of alleviating pressures on their respective housing markets. That list includes Barcelona, Vienna, and New York City, among others. In Canada, both Quebec and Halifax recently announced actions as well.

It's unclear what the Government of Canada can really do, however, as short-term rentals are an area of provincial jurisdiction, rather than federal jurisdiction — a reality Freeland acknowledged on Tuesday. Despite that, Freeland said housing is such a big issue that the federal government is looking at everything.

"It is so important that we are examining whether there are any tools in the federal jurisdiction that we could use, that would make a difference in this space," Freeland said. "And the reason we're so focused on it is we really do understand that housing is a very challenging issue for Canadians, and we believe that the core challenge is that there just aren't enough homes available for people to buy or for people to rent, so we're reviewing the space and we're thinking 'what can we do in both the medium-term and immediately to relieve some of the pressure."

She went on to cite an estimate that 30,000 units of housing could be added back to the market in just Vancouver, Toronto, and Montreal if action were to be taken.

"That would make a big difference," she said. "And that's why, recognizing — as we do — that this is in provincial jurisdiction, we are taking a very careful look at whether there are any tools in the federal toolbox we could use as well. But if other provinces want to follow BC's lead, that would be great for Canadians, too."

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The B.C. government has ordered 10 of the largest municipalities in the province to build more than 60,000 new units of housing over the next five years — or face consequences.

Housing Minister Ravi Kahlon announced the exact numbers for net new units in the 10 municipalities on Tuesday, months after the province first said those communities would be targeted as part of the government's push for additional housing supply. 

"We're taking action and working with municipal partners to make sure more homes are built in communities with the greatest housing need," said Kahlon in a statement.

"The targets include thousands of below-market rental units for the largest and fastest-growing communities. This means more people will be able find a home in the community they love."

The 10 municipalities are Vancouver, Victoria, Kamloops, Abbotsford, Delta, Saanich, North Vancouver District, Port Moody, Oak Bay and West Vancouver.

Overall, the number of units they're being asked to add to their housing stock in the next five years ranges from 28,900 in Vancouver to 664 in Oak Bay — but when adjusted for population, all 10 would see an increase of units between eight and 14 per cent by 2028. 

In addition, the province has put in place separate sub-targets for each municipality by year, by whether the units are rentals or ownership, by whether the rentals are market or below market, and by number of bedrooms. 

If municipalities fail to meet their targets, the government has said they retain the option of appointing an adviser or issuing a directive that could usurp the traditional jurisdiction of municipalities to oversee land use within their boundaries. 

Eby in Ottawa

Kahlon said the 10 chosen communities were selected through "an objective, thorough and measured process" that factored in metrics, including projected growth, housing and land availability, affordability, community infrastructure and "unrealized potential in developing more homes."

Premier David Eby, who has spent two days in Ottawa meeting with federal ministers and Prime Minister Justin Trudeau, says affordable housing would be made available quicker with the co-ordination of all levels of government.

He says the federal ministers were receptive to that pitch.

Eby's trip to Ottawa comes after the federal government announced a $4 billion Housing Accelerator Fund in its 2022 Budget that would provide incentive funding to local governments to encourage initiatives that lead to new housing supply.

"My understanding is the federal government is close to being able to make announcements in terms of the allocation of that funding to support growth in cities, which is very good news," Eby told reporters Tuesday.

"The challenge or the opportunity, I guess, is to co-ordinate that municipal accelerator program with the cities that our housing minister has been working with on housing targets."

The premier said he also made "very good progress" in advancing the interest of B.C. residents in his meetings with the federal ministers, noting he is "particularly happy" with his discussions around how the federal and provincial governments can work together to support the clean energy sector.

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The City of Coquitlam has approved increases to its rates for development cost charges (DCCs), increasing the price to build in a municipality that's become very popular among developers in recent years.

In Coquitlam, development cost charges are levied on all development applications with a construction value below $150,000, and the City uses the revenue to help pay for expanding necessary infrastructure, including transportation, water, sewage, drainage, and parks.

Development projects that require rezoning are also subject to community amenity contributions (CACs), but DCCs for non-residential projects are very low, so as to not hinder economic growth.

Like many other municipalities, the City of Coquitlam reviews its DCCs regularly and adjusts the rates in order to reflect the economy and growth trends. As part of this process, the City is now raising all of its DCCs by 4.5%, reflecting the 4.5% increase in the Vancouver Consumer Price Index published by Statistics Canada in April 2023.

Following the increase, the total DCC for single-detached homes is now at $63,141 — by far the highest of any type of development. Multiplex housing forms have a total DCC of $41,448 per unit, followed by rowhouses and townhouses at $37,418 per unit, and then multi-family complexes at $23,715 per unit.

"While this increase is below the construction cost escalations observed over the past year estimated at 10%, it helps the City's rates to keep up with the inflationary cost increases in the region," staff said in a recent report.

The 4.5% increase is relatively modest when compared to other municipalities. In Vancouver, rates for DCCs were set to increase by 8.3%, until Council opted to defer the increase until 2024 in order to avoid further worsening project viability for developers.

Earlier this year, the City of Surrey also increased its rates for DCCs, by 9.3%, which are now in effect. Although Coquitlam's increase of 4.5% is much lower, the actual DCC is higher in some cases. In Surrey, the total DCC charges for non-multi-family homes do not exceed $53,154. DCCs for multi-family homes are then charged according to square footage rather than per unit like in Coquitlam.

Coquitlam City Council granted a first, second, and third reading to the bylaw amendment earlier this month, before granting a fourth and final reading Monday evening.

Applications that are currently in progress will be protected, and the new rates will come into effect on Sunday, October 1.

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To improve affordable housing, a B.C. economist says the province needs a more progressive property tax system — one that raises levies on high-value properties and people who own multiple homes.

Such a policy, says Alex Hemingway, will raise billions of dollars for public housing projects while simultaneously dampening home price growth over the long term.

The policy proposal, laid out in a white paper published Wednesday with the Canadian Centre for Policy Alternatives of B.C., comes as residential property values have grown a “staggering” $1.7 trillion over the past two decades, leading to greater inequality among those who own a home and those who don't, says Hemingway.

“In terms of addressing the inequality that’s been created, that’s really where property tax comes front and centre,” Hemingway told Glacier Media in an interview.

Because property tax reform is both complex and contentious, Hemingway is calling on a citizen’s assembly to discuss options.

12% of B.C. households would pay more, says economist

Hemingway's proposals largely focuses on greater taxes on the priciest properties in B.C., but also reforms along the edges, such as greater emphasis on taxing land and not buildings, as a way to incentivize denser forms of housing.

To raise an extra $580 million annually, Hemingway proposes doubling the existing provincial property surtax on residential properties valued above $3 million (to 0.4 per cent) and $4 million (to 0.8 per cent), as well as adding a new bracket above $7 million (1.5 per cent).

To raise even more money, Hemingway suggests the provincial government apply extra property taxes on owners of multiple homes and properties valued at over $1.5 million. In such a scenario, just 12 per cent of B.C. households would pay more, adding about $2 billion for public housing projects.

That surtax, known as the Additional School Tax, was brought in by the BC NDP government in 2019 and is opposed by the opposition party, BC United.

“The B.C. government has taken some important but limited steps in recent years when it comes to taxing residential property wealth,” said Hemingway.

Lack of public investment adding to cost-of-living crisis

Hemingway said the existing surtax is a “drop in the bucket,” compared to recent gains in property values, which currently climb around $223 million annually.

Despite political opposition, Hemingway says polling shows high public support for taxing the wealthy.

“People recognize [higher home values] has been a stroke of luck, and it’s unintentionally come at the expense of others. And that’s corrosive on our social fabric,” said Hemingway.

Hemingway says public spending as a percentage of GDP has declined over the past generation.

“That lack of public investment has contributed to some of the cost-of-living crisis we’re seeing. And that’s why it’s sensible to be thinking about raising additional revenue,” he said.

Hemingway further proposes more complex changes to the current property tax scheme. By shifting tax away from buildings to the land itself, the government could incentivize building denser forms of housing, which Hemingway supports.

Hemingway says it’s also worth considering a consistent property tax rate, as opposed to having it fluctuate (historically downward) to align with government budgets.

“A first step would be to stop automatically cutting provincial property tax rates when property values rise faster than inflation. Holding rates steady wouldn’t raise much revenue initially, but if property values continue escalating, it would raise revenue and ensure more land value gains are captured for the public good,” wrote Hemingway.

To address declining property values, Hemingway suggests a rate floor, especially in regions where home prices are extremely out of line with local incomes.

Hemingway says governments may also want to consider expanding property tax payment deferrals until a property is sold. Currently, the deferral program only exists for homeowners over age 55 and families.

Under a higher property tax scheme, Hemingway said “we may want to expand and if not universalize that option.”

At the heart of Hemingway’s proposal is an effort to disincentivize housing, or land, as an asset class.

Open to 'tax shift' proposal to lower burden on low and mid-level earners

While not including it in his proposal, Hemingway says he supports a plan backed by the think-tank Generation Squeeze that would lower income and sales taxes to offset any hike in property taxes.

The plan seeks to cut provincial income tax on the first $30,000 an individual earns. B.C.’s second income tax rate would be eliminated, leaving earnings from roughly $40,000 to about $79,000 taxed at the rate of 5.06 per cent rather than 7.7 per cent. Furthermore, British Columbians would pay a provincial sales tax between five and seven per cent — all in exchange for a property surtax on properties valued at over $1 million.

“Right now we shelter housing wealth, especially high housing wealth, from taxation and we disproportionately draw on income taxation, including from middle and lower income renters, who aren’t benefiting from massive housing wealth growth,” said Paul Kershaw, a professor in public health at the University of British Columbia and head of Generation Squeeze.

Kershaw says his “tax shift” proposal — aimed at addressing generational wealth inequities — is needed to pay for the growing social and health needs of an aging population. For that reason, he said it only makes sense to draw revenue from that source, which happens to own much of the land in the province.

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Prices continued to edge upwards in the Canadian resale market last month — seeing a near-record rise, no less — but the same can’t be said for the new home segment, underlining the considerable headwinds facings homebuilders across the country.

Statistics Canada’s (StatCan) new housing price index fell by 0.1% between June and July, not only erasing the 0.1% increase observed the month prior, but marking the first dip since May. Prior to May, national new home prices had been trending downwards since August 2022.

New home prices slipped the most month over month in Victoria (-0.8%), followed by Greater Sudbury (-0.7%), Regina (-0.5%), and Ottawa (-0.5%), “with builders in many CMAs noting weakened market conditions as the reason for the reported monthly declines,” said StatCan on Monday.

Conversely, prices edged up month over month in Sherbrooke (+1.2%) and St. John's (+1.0%).

Year over year, new home prices slid 0.9% nationally. StatCan attributes this to borrowing costs, which have risen steadily since July 2022 and have served to hamper the new housing market. The government agency also points to the fact that there was 54.2% more unabsorbed inventory (single-family homes completed but not sold) in July 2023 over July 2022, according to the Canada Mortgage and Housing Corporation.

Locally, Victoria also led the year-over-year decline in July, with new home prices falling 3.7%. Prices also slipped in Edmonton by 2.9%. Meanwhile, the greatest year-over-year increases were observed in Québec (+3.5%), Calgary (+1.6%), and St. John's (+1.6%).

Industry “Downbeat,” Says Home Builders’ Associations

July’s overall price slide is another burden to bear for Canadian homebuilders, 67% of which are already scaling back their building endeavours given the pressures of the times according to a recent report for Q2-2023 from the Canadian Home Builders’ Association (CHBA).

What’s more, out of fear that they won’t secure the buyers necessary to render their projects worthwhile, 22% told CHBA they are axing projects completely.

“While the spring busy season helped prospective new home sales traffic somewhat, affordability challenges related to interest rates and construction costs remain very much a concern, and have been compounded by the July rate hike by the Bank of Canada shortly after Q2 survey data was collected,” said the organization earlier this month.

“Converting prospective buyers into sales remains a challenge, as do closings from previous sales. Due to the high interest rate environment, nearly half of CHBA’s panelists reported that buyers are requiring alternative lending solutions and one-third said they are needing to make accommodations for some buyers so they can close.”

All in all, said CHBA, the Canadian homebuilding industry “remains downbeat,” which spells dismal things for not only homebuilders, but the housing market at large.

New data from Canada Mortgage and Housing Corporation (CMHC) shows actual housing starts in Metro Vancouver over the first seven months of 2023 through the end of July were up by 50% compared to the same period in 2022.

A total of 211 single-family detached housing starts were recorded in July 2023 — down from 276 in July 2022.

But for all other housing types, a broad category that includes apartments, CMHC recorded 2,751 actual housing starts in July 2023 — up from 1,700 over the same month last year.

The total number of housing starts in Metro Vancouver in July 2023 reached 2,962 units — up from 1,976 in July 2022.

Province-wide, British Columbia saw a total of 4,002 housing starts in July 2023 — slightly up from 2,798 units in July 2022.

Generally, housing starts are defined as the beginning of construction work on the building.

For housing starts seasonally adjusted at annual rates (SAAR), based on a six-month moving average, CMHC recorded a total of 35,438 units in Metro Vancouver as of July 2023 — down from 46,282 in June 2022. Provincially, this rate was down by 25% to 47,730 units.

Nationwide, housing starts SAAR in July 2023 increased for the second consecutive month.

“Despite a decrease in the SAAR of housing starts relative to last month, July saw a healthy number of actual housing starts from a historical perspective. This pushed the trend of housing starts upward for the second consecutive month. Market intelligence suggests multi-unit projects started in June and July were likely financed a few months prior, so the effect of the most recent interest rate hikes on housing starts remains to be seen,” said Bob Dugan, the chief economist of CMHC, in a statement.

According to MLA Canada’s separate account for the combined areas of the real estate boards of Greater Vancouver and the Fraser Valley, there were five pre-sale project launches in July 2023 with a combined total of 326 pre-sale units. This is down from their June 2023 tally of 16 project launches with a combined total of 1,849 pre-sale units.

In anticipation of falling interest rates, home sales and prices began to rise across Canada in February as sidelined buyers returned to the market. Although the Bank of Canada reignited its rate hike campaign in June, both metrics have continued to climb.

According to the latest figures from the Canadian Real Estate Association (CREA), home sales rose 1.5% month-over-month in June, while the Aggregate Composite MLS Home Price Index climbed 2% -- a "large increase for a single month."

From January to June, the unexpectedly frenzied spring market led sales activity to soar nearly 400% in some cities, while prices increased by as much as 19%.

With purchasers seemingly unperturbed by rising rates, Zoocasa compared home prices and sales activity from January and June to determine where buyers have bounced back.

Nationally, home sales have more than doubled, up 139.62% in June compared to January. But, of the 23 cities included in the real estate agency's report, 15 have seen even greater gains, while only one has seen sales rise by less than 100%.

Guelph experienced the most significant increase -- the number of homes sold in June was 387.38% higher than in January -- followed by North Bay, which recorded a 366.67% increase in sales over the same time period.

As the report notes, though, the aforementioned markets are on the smaller side and saw fewer overall sales -- 424 and 126, respectively, in June. When looking at larger cities with over 1,000 sales per month, Fraser Valley experienced the largest increase in activity, at 214.46%.

The Greater Toronto Area saw the highest number of home sales overall in June, at 7,480, a 141.29% jump from January, while Calgary's 3,996 sales marked a 162.38% increase from January.

The only region to not experience at least a doubling of sales was the Quebec CMA; activity was up 42.8% in June compared to January.

With sales soaring, and inventory low, prices have begun to creep up as well. The national average price hit $760,600 in June, a 7.89% increase from January.

In Sudbury, where sales have risen 195% since the start of the year, prices have increased by 19.22%. Despite the jump, the city's average home price of $456K is still considerably affordable.

Sitting at a comparable $408,900 in June, prices in North Bay have risen 11.57% since January. Even Quebec, with its comparatively slower increase in sales, saw prices rise 6.66% to $337,800 from January to June.

Concerning large markets, Fraser Valley once again led the way -- the city's average home price hit $1,040,900 in June, a 10.82% jump from January. The GTA trailed, with prices increasing 9.41% to $1,171,300 from January to June.

Montreal sat at the other end of the spectrum, with prices rising just 3.45% to $516,400. The city saw sales jump 102.51% from January to June.

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