This January, as with every January for many years, the Realtors Association of Edmonton has produced their market outlook. Over the past couple of years we have been lucky enough to have CIBC Chief Economist Benjamin Tal as our keynote speaker. The erudite Mr. Tal is always full of detailed market insights that only a man of his learning and experience would think to dive into, and is rarely wrong – well, except maybe for last year. In his defense though, everybody got it wrong last year. We all thought covid would soon be over with the introduction of the vaccines- boy, were we all wrong.
This year he feels the pandemic will likely change to endemic as our defenses are improving and one suspects he will be right given the increasing number of treatments available to fight covid.
Nonetheless, the situation is still somewhat fluid and changing (who would have thought even as little as a month ago that truckers might be the catalyst that sparks the lifting of lockdowns?). That said, let’s have a look at his thoughts. I typed this as I listened to the presentation so the grammar may be a bit “point form” in spots but hopefully not too difficult to contend with.
Effect of Covid on GDP
Canada has the lowest number of spare beds lowest in OECD except Mexico. We often make fun of the US, its more open economy and resultantly higher hospitalization rate. The sad fact is that they have spare capacity, we don’t. We shut our economy down harder at lower levels of hospitalizations because we have to. Our economy is taking a significantly harder hit and our government has had to infuse significant amounts of our future tax dollars into our economy.
During the second wave, mining and oil and gas were hit hard with a 1.2% drop in their contribution to GDP, but only down 0.4% second wave and they are actually up around .5% in this wave. Auto manufacturing and trade was down slightly in the second, third and now current wave, but accommodation, food, arts and air transport have been hard hit in each wave, with their contribution to GDP down about 1.4% in the second and third waves, and about 1% in the current wave.
Rising Prices and Inflationary Pressures
With the rapidly rising house prices and rent levels only slightly rising, the house price to rent ratio has risen such that rents would have to rise 37% to bring the ratio back into line. This should present long term inflationary pressures.
Personal savings have gone through the roof in Canada due to the combination of government relief spending and the inability for Canadians to spend that money. The amount of savings is estimated as high as $300B, although most is going towards investments and gifting to children for home purchase. Personal deposits (checking accounts) add up to about $90B and that is going more directly into spending.
In the US, spending on goods (not services) has skyrocketed, up some 35% while supply chain is constrained. This is a “demand shock” and a huge part of the contribution to inflation. Mr. Tal feels the spending on goods will decrease, easing inflationary pressure. It is hard to say exactly when pressure will ease, but likely within about a year.
The Labour Market
While the proportion of people quitting their jobs in the US is at record highs, in Canada our quit rate is somewhat higher but more Canadians are only “thinking” about quitting in record numbers. If these Canadians decide to quit, then our labour market may tighten further.
The majority of the US quitters are over 55 and may very well not come back, whereas in Canada it is more varied.
This has caused US labor rates to rise. Canadian paycheques are rising as well but not near as much because of immigration. Canada’s immigration per capita is 1% vs the US rate under 0.2% so the wage inflationary pressures are, while still there, not as great.
Surprisingly, the largest percentage of immigrants to Canada came from, well, Canada. Close to 70% were already here, they just were granted immigrant status in the last year and, hence, were now able to enter the work force. Most were students already in Canada. Since they were already here, most of them are familiar with our society and are more ready to enter the workforce. Additionally, they will be ready to buy homes sooner as well. Adding to this, they have no family here to stay with, they are more likely than younger Canadians to enter the home ownership market sooner.
Another complicating factor, supply of new homes is not rising as quickly as demand. Completed and absorbed single family homes in Canada have dropped from a high of close to 6000 in 2013 to the current levels around 3500. Housing starts were much higher in 2021 so as they complete pressures will soften somewhat but probably not as much as is needed.
To top everything off, gifting of down payments from parents to children has risen from 20% of buyers in 2015 to almost 30% these days, much of it coming from outside the country. But wait, we’re not done yet. The average gift rose from 50k to 80k over the same time period.
As a mitigating factor, manufacturers are turning more to technology to replace increasingly expensive workers. This will help increase productivity which in turn reduces inflationary pressures.
His final point was that most of the current inflationary pressures are likely temporary due to factors arising from covid. He felt that inflation will likely return to more “normal” rates in 2023 or 2024. Our real opponent is going to be rising interest rates over the next year but he (and likely other economists) urges the government to go slowly so as not to overdo it and tip us into a recessionary period.
That’s pretty much Mr. Tal’s presentation in a nutshell. Any errors are most likely mine. Stay tuned over the coming days for my synopses of the other presentations.