-Learn more about the reality of the housing market in Canada -Understand there are options outside of homeownership -Discover trends in the housing market
Homeownership remains a top goal for many Canadians, but with rising interest rates and inflation, many are feeling like it’s becoming further out of reach. In this episode, CIBC Deputy Chief Economist Benjamin Tal discusses the realities of the housing market. We explore the general mindset on renting in Canada, whether it is a good time to buy a home or take on an investment property and how developers are unable to supply family-friendly units. If you want to learn more about the housing market and its future, tune in to the episode.
Carissa Lucreziano: Welcome to Smart Advice, a podcast bringing you financial advice, investment strategies and economic trends. I am Carissa Lucreziano, CIBC’s financial advice expert.
Today we're going to talk about a topic that can be quite debatable these days: renting versus buying a home. The housing market has changed dramatically. Inflation, although stabilizing, is at its highest levels we have seen in a long time and higher interest rates have impacted Canadians' bottom line in ways that we never expected.
This has sparked a lot of conversation around money, about renting versus buying. From affordability to wealth accumulation, most if not all, Canadians want to know what route will be best for them to be set up for financial success.
In Canada, it's a pretty strong feeling that home ownership is one of the big goals to achieve. We recently conducted a homeownership poll and 87% of current homeowners are proud to have achieved this goal. But just over a third believe that buying a home has made their life more difficult financially.
Joining me for today's conversation is Ben Tal. CIBC’s Deputy Chief Economist. Ben, you and I started off this year talking about the economic forecast. And we talked about some of these big topics.
We had so many viewers reach out to us and ask us specifically, whether it was a good time to buy a home, take on an investment property or consider moving. Many also raise concerns about rental inventory in Canada as well, and I know this conversation has only continued and it's been a hot topic on your weekly segment with BNN. Bloomberg. Ben, welcome to our podcast today.
Ben Tal: Thank you. It's a pleasure.
Carissa: Thanks so much. So let's start off with the real estate market in Canada. You know, if you're looking to buy a home and you're starting savings from scratch, that could take a while. The Global Mail just published a piece on housing affordability in Canada. In more affordable housing markets like Winnipeg, it could take about two and a half years to save for down payment.
The situation is very different in markets where the cost of a home is significantly higher. Like Vancouver, you're looking at 28 years. Toronto is 25 years to save for that initial downpayment. Ben, I'm sure you saw these stats, you're aware of them. How did we get here, first of all, and what trends are on the horizon that could change this picture of affordability?
Ben: Yes, the real estate market in Canada, it's very hard, it will continue to be very hard despite the fact that it's slowing down. The question is why? The answer is basically what happened during the pandemic. If you look at what happened during the pandemic, prices went up by 46% in two years. That's crazy. 46%. Why? Because of the symmetrical nature of this crisis. All the jobs that are lost, we know were young people: renters.
In fact, rent went down during the pandemic. Homebuyers, homeowners? They basically got the benefit of a recession vis-a-vis extremely low interest rates without the cost of a recession vis-a-vis broadly based increase in the unemployment rate. We have never seen anything like that.
There was a sense of urgency to get into the market. And parents, by the way, told the kids you go to the market, we will help you. Gifting reached a record high during the pandemic. So when there is a sense of urgency to get into the market, you borrow activity from the future. You form activity. And the future has arrived. We are in the future.
This slowdown in the housing market is not a free phone. It's not a correction. It's reallocation of activity over time. So the future has arrived, the market is slowing. But we know that now it's starting to stabilize given the fact with interest rates starting to stabilize at a reasonable rate. That's more or less where we are, as far as the labor market is concerned.
The rental market is on fire because we simply don't have enough supply. We know that people are waiting in line to get into an apartment. It's simply not available. And that's a crisis that I see.
Carissa: And so can we expect fiscal policies to bend or amend to help with this challenge of housing affordability for Canadians? I know you mentioned there are some Canadians that are getting help from their parents, maybe their grandparents, a gift, but that's not for everybody.
Ben: Absolutely. And that's a very unfortunate situation because the income gap in the wealth gap in Canada is actually widening because of that. I think we have to really change the way we think about renting. I want to create a situation in Canada in which you are 35 years old. You are married, you have two kids and you are renting. Nothing is wrong with you. The way it is in Berlin, the way it is in London, the way it is in the in New York. That's the way it should be.
We have to create this mentality in which you can choose to rent for the rest of your life if you want to, or at least for a period of your life, and it's fine. There is nothing wrong with it. In order to do that we need more supply of rental units. And believe me the new wave of renters will not be just what we have seen before students. It will be young families with kids, it will be older people downsizing.
And what they want is to deal with a landlord that is a company. Not a condo owner. The condo market cannot be the rental market. And the rental market cannot be the condo market. We need purpose-built apartment buildings, individuals renting, families renting, dealing with a company, achieving stability.
That's what we need. We have to change the way we think. In order to do so, we need more supply. And that's where the government enters the story. We have, in 2022, we have seen no less than 950,000 people entering this country: non-permanent residents, permanent residents, students, people from the Ukraine on a three year visa. This year, I estimate it would be 1.1 million.
None of them, none of them is carrying a house on their back. So we have a lot of demand, the supply is not there, the supply of rental apartments is simply not there. We have to provide incentives to developers to build more purpose-built rental as opposed to condos. We need to defer HST payment, we have to reduce development charges. We have to provide tax incentives, all kinds of tricks to make sure that companies, developers choose to build purpose-built that will tailor to the increased demand that we see on an annual basis.
Carissa: Yeah, so I mean, you just talked about some of the aspects of what's going to help improve the rental environment in the future for Canada, but it really still is, I think I was reading in Switzerland, 60% of people are renters. In Germany, it's like 64, what is it in Canada like 30? Or 35%? Something like that?
Is there something else like the mindset that we're going to have to shift to believe that you gave that great example:, you're 35 years old, and you have a family or you have your career etc, etc? Whatever you believe that success is or what your goals are, but you're renting and it's okay. Is there something else that has to shift in our mindset to be able to switch this way or to pin it?
Ben: Yes, that's a very good question. And that's a tricky situation, because we are brainwashed to basically buy a house when we reach thirty, and if not, something is wrong with you. And I think that if you look at other countries, not so the case and they are doing fine.
I think the way to change that mentality is to provide more high quality, purpose-built rental. One of the reasons why it's not working at this point is because of the fact that the condo market is the rental market. And the condo market is not geared towards families. The units are very small, and it's not stable, because they're owner can kick you out whenever they want because their kids are coming back from university. We all know the story.
We need stability, so their mentality will change with supply. Also education, we can walk with people and basically provide information and for some people rent would be better than actually owning a house or vice versa. Learn more about the options, don't go just to homeownership.
I stated only a possibility. That's the way I see the situation. But the key condition here is supply. The more supply we have of purpose-built rental, the higher the quality is, the better, I think that will solve the issue and will slowly change the mentality that now we are experiencing.
Carissa: And how quickly do you think we'll get to seeing some positivity or you know, evolution in that space?
Ben: It's very difficult to predict. I really don't know. But what I know is that there is a sense of urgency to increase supply. A government that set the quotas for immigration, non-permanent residents and even students must be part of the solution to house them.
We cannot have one million people entering the country without this solution. And the private sector is simply not equipped to do it. Therefore we need government support. We need to provide incentives. The quicker we have more supply of purpose-built, the quicker the suggestion would be resolved. This is a very significant part of this puzzle, called housing affordability in Canada.
Carissa: And so if we're going to see an increase in that number in the future, and what you're saying makes absolute sense and will absolutely help produce more rental units. Will domestic investors still be interested in buying real estate for rental purposes? Will it shift more to corporations owning? How do you see that playing out?
Ben: Yes. At the moment, it's really individuals. And what's interesting is that many of them are in negative cash flow. We estimate that at this point, because of higher interest rates and all the other things that are happening, inflation, about 52% of condo investors are in negative cash flow. They basically lose money which means that we are not going to see a significant increase in investment anytime soon. Remember those condos are a very important part of the rental market.
Therefore we have a situation in which the supply of rental is going down when we have a situation in which the demand is rising. That's a sure-fire recipe for increased rent. That's why we need to focus on purpose-built. And yes, it will be passion funds with deep pockets that can actually look at the long term horizon and not really worry about the next year. That's the model. That's the direction we should go.
Carissa: So Ben, I know you mentioned that the market value of houses increased 46% in a span of a few years. But let's talk about those homeowners that maybe just bought a home, let's say in the last year. What kind of appreciation can they expect, or Canadians in general expect to see over the next decade?
Ben: Very difficult because it really depends on what we do. If we build more and more supply, then the market story will be eased and therefore, inflation will be lower when it comes to housing. However, if you ask me for the next decade, then what I expect regarding the speed of the changes, I suggest that after falling by about 20%, maybe 25%, this market will stabilize over the next year.
They start going up and I will not be surprised if home price inflation will be higher than overall inflation, 3, 4, or 5% a year on a regular basis. That's why we need more and more supply to ease the inflationary pressures on housing.
Carissa: Ben, thank you so much for being my guest today. I am sure this won’t be our last conversation on the topic.
Ben: A pleasure thank you.
Carissa: The decision to rent or buy will continue to be something that Canadians weigh in on and there is a case to be made for both. There is a lot that factors into this big decision. It can be mostly driven by current financial situation, downpayment ready, cash flow ready.
However, a lot comes down to other important things like where you want to live, proximity to friends and family, and the time and energy you have for everything that goes into homeownership. Talking to a financial representative to help you understand the big financial picture, including your goals and responsibilities can really help you decide which way is better for you.
Thank you to our listeners for tuning into this episode of Smart Advice. To make sure you never miss an episode, subscribe or follow on your favorite podcast platform. And visit us for more advice at cibc.com/smartadvice