By Ted McIntyre with Benjamin Tal, Deputy Chief Economist, CIBC
Interest rates will fall, says CIBC expert—but when
From pandemics to political flashpoints the world over, “it’s very difficult to predict the economy in this volatile environment,” admits CIBC Managing Director and Deputy Chief Economist Benjamin Tal. “The consensus a year ago was that inflation would peak at 4% and interest rates would go up to 3.5% to 4.5%. That was an underestimation.”
Still, the highly sought-after Tal took time to gaze into his crystal ball and share his educated opinion with OHB last month. The news, however, is perhaps not as rosy as we’d hope.
OHB: So where do we stand now on the Canadian economy?
BT: “It slowed under the weight of high-interest rates—we’re expecting about 0.4% growth for the third quarter—but the U.S. GDP growth was, and remains, surprising, operating at about 4%. They are less affected by higher interest rates because their mortgages are for 30 years and their level of debt isn’t as high as Canadians, so there’s no urgency to save. They’re still in a spending mode. But that will be the next shoe to drop. At some point, the U.S. will follow the example of the Canadian economy, and that’s when the 10-year rate will go down on both sides of the border.”
Why did it take so long for the higher interest rates to slow inflation?
“When the Bank of Canada was raising rates, we were spending our excess savings from the pandemic—sabotaging the monetary policy. So the Bank of Canada was impotent to deal with the situation because we were spending our savings. But now we feel the pain immediately.”
Did the feds push interest rates too far, too fast in the process?
“I personally think the Bank of Canada overshot. Given the sensitivity of the Canadian economy to higher interest rates, they could have stopped at 4.5%. The last two basis points were overshooting. But you only ever know that for sure in retrospect, and if they were going to overshoot or undershoot, it’s a lot easier to overshoot and cut interest rates than to fight inflation.
“But there’s no question it affected the housing market. You cannot have a 500 basis points increase in interest rates over the course of breakfast without a major impact on the housing market. The lack of supply has protected prices until now. But new listings are showing up, especially in the condo space. Sales are in free fall, down 41% year-over-year and 15% below 2011, the last major market upheaval. The housing industry is facing its biggest test since the 1991 Recession.”
How serious has the impact of high rates been on new-home buyers?
“Mortgage interest payments have increased 30%. That’s a factor impacting overall inflation. The question is, to what extent should it be part of the inflation story, especially given the fact that interest rate payments are determined by the Bank of Canada’s policy?
“It’s a given that debt delinquency/default rates will be rising, and that’s why banks are putting money aside. It’s something we’ve already taken into account (in our forecasts).”
Where do you see interest rates going this year?
“The big reset—the repricing of mortgages when most borrowers have to renew—will be 2025-2026, so we need to see interest rates falling before that. Our prediction is that the Bank of Canada will start cutting rates in May/June of this year and will cut by about 150 basis points over the course of the year, from our current 5% overnight rate to 3.5%. That will be followed by another 50 to 75 basis points during the course of 2025 to get down to 2.75%-3%. That will ease the pressure for some people’s mortgages.”
Will home prices continue to rise?
“We first have to go through the next six months or year, where the pressure will still be there because of rising supply and demand remaining weak. But demand will continue to be a major factor moving forward. However, developers are not building enough. Presales are down. Whatever condo activity you see now is a project that was sold years ago. Developers will not launch many new projects anytime soon. But we have population growth second to none other in the G7. It grew by more than a million (from July 1, 2022, to June 30, 2023). So a year and a half from now, when interest rates are notably down and demand is back, the supply will not be there. So, it’s safe to assume that two or three years from now, we are going to see major pressure in the housing market, with a significant mismatch between high demand and low supply.”
For stability and predictability, should the Canadian government consider adopting 30-year-term mortgages as they have in the U.S.?
“That’s a debate that’s been going on forever. The way banks finance themselves in Canada is based on five years. That’s the way the system works right now. The 30-year rate in the market is very illiquid—that’s the issue. But yes, we have to look at other ways of lending to increase the threshold, with mortgage term jumps to 10 and even 30 years.
You expect a slowdown in the U.S. economy. Is that good or bad news?
“A slowing U.S. economy will have a negative impact on the Canadian economy due to the strong link between the two. But the minute the U.S. economy starts going down, their 10-year rate will fall, and ours will follow. So bad news can be good news.”
What in particular might mess with your predictions?
“It’s a long list—the Middle East crisis can get worse, affecting the oil market and therefore inflation and food prices. There’s China and Taiwan. All predictions are based on the status quo. Economically, though, I worry about the inflation and the continued overshooting, which would result in more recession. I’d like to see inflation getting back to 2%. But that last mile is always the most difficult.”
Become a member of the Ontario Home Builders’ Association.