Canada's population has surpassed 41 million, growing at a rate of approximately 4,000 people per day, equating to nearly 1.5 million per year according to StatCan's real-time tracker. This indicates a significant increase, with 480,000 people added in the past two months alone. If this growth rate persists, it will surpass the federal government’s 2024 target. Historically, a 1.2 million annual growth rate strained housing and infrastructure, and the current trend suggests even more rapid growth, potentially leading to further challenges.

In March, building permits issued fell by 4% month-over-month, with a 7% decline in single-family homes. This trend undermines the federal goal of constructing 3.8 million homes over the next seven years. Although there is currently a strong pipeline of homes under construction, the decline in new permits suggests a potential future shortage, particularly in populous provinces like Ontario and British Columbia. New home completions are at a seven-year high, but the number of dwellings under construction is declining, indicating fewer new homes will be available in the coming years.

Canada’s total active housing inventory rose 6.5% in April, with notable increases in British Columbia (43%) and Ontario (58%). Total available listings now stand at 160,000, up from a low of 90,000 in 2022, but still below the peak of 250,000 in 2015. Alberta, however, saw a 20-year low in inventory, contributing to record-high real estate prices. May's data will be crucial to determine if this inventory spike is an anomaly or the start of a new trend.

A recent comment by Prime Minister Justin Trudeau highlighted the government's inclination to protect housing prices rather than making homes more affordable. This stance is seen as a strategy to maintain voter support and economic stability. Measures such as allowing homeowners to defer mortgage payments during the COVID crisis and extending amortizations during rate hikes illustrate this approach. The housing market is unlikely to see significant price reductions regardless of political changes, as no politician would risk campaigning on lowering home values but rather making them more accessible or affordable to buy.

The next interest rate announcement on June 5th is highly anticipated. Markets expect a modest rate cut of 0.5% in 2024, starting in July, with a long-term outlook of rates decreasing to 3.5% by 2026 and 3% by 2028. A rate of 3% would stabilize the housing and investment landscape, avoiding extreme lows seen during the Global Financial Crisis and the COVID pandemic. The average and median home prices are currently at all-time highs, with the Home Price Index (HPI) at a two-year high. Despite low sales numbers, the market remains robust with 2,700 sales, marking the fifth-highest total over the past 24 months.

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Inflation has decreased to 2.7% this month, down from 2.9% the previous month. This marks the lowest inflation rate in over three years, specifically since March 2021. At that time, the overnight interest rate was 0.25%. Despite this improvement, shelter costs continue to drive inflation, with increases at 6.4%, up from 4.9% last year. Mortgage interest costs have surged by 24.5%, and rent has risen by 8.2% compared to April last year. When excluding shelter costs from the Consumer Price Index (CPI) basket, inflation would be just 1.2%.

This decline in inflation could open the door for a potential interest rate cut at the upcoming June 5th announcement by the Bank of Canada (BoC). However, with the current inflation rate still above the 2% target, sustained reductions to the target level are preferred before any decisive action. The market is pricing in a 55% chance of a rate cut in June, but certainty remains low. The BoC’s approach is reactive, and it could be six months before inflation stabilizes at 2%.

In April, the BoC slightly revised its neutral rate, which is now set at 2.25% to 3.25%, up from the previous 2-3% range. This revision, influenced by higher US neutral rates and domestic factors such as higher long-term labor input growth offset by lower productivity growth, suggests a relaxation of stringent economic requirements.

The BoC’s updated assessment considers the impact of government debt and population growth on the neutral rate. Increased government debt and more generous public pensions put upward pressure on the neutral rate, suggesting prolonged higher taxes, ongoing inflationary pressure and overall higher prices.

The Canada Revenue Agency (CRA) now requires tenants to withhold and remit 25% of their rent if their landlord is a non-resident. This is to ensure the CRA collects taxes owed by foreign property owners. Tenants must also file an NR4 tax form, and failure to comply can result in the tenant being held liable for unpaid taxes, penalties, and interest. This policy faces practical challenges due to the lack of a public beneficial ownership registry, making it difficult for tenants to verify if their landlord is a non-resident. Consequently, tenants could face eviction for not paying full rent if they withhold the 25%.

RBC predicts significant interest rate cuts starting in 2024 and going through 2025, with a 25-basis point cut anticipated in June and a total of 200 basis points in cuts by the end of next year. They expect the Canadian dollar to weaken, impacting housing affordability and resale activity. Despite weak affordability, resale activity is expected to pick up mid-year as rates fall. Home prices, which were down 2.6% in 2023, are projected to decrease by another 1% in 2024 before rising by 3.1% in 2025.

Active home listings have reached over 13,900, marking a five-year high since September 2019. While this increase in inventory might lead to better deals for buyers, it will take months to absorb this supply. A potential rate cut could temporarily stimulatebuyer activity, particularly in typically slow months like August when motivated sellers might offer better deals.

_________________________________

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778.898.0089
ryan@thevancouverlife.com

www.thevancouverlife.com