News: CIBC’s Benjamin Tal expects rents to rise faster than home prices
- Shael Soberano
- Jun 8, 2022
- 3 min read
In this week's Industry News (Week of 6 June 2022).
CIBC’s Benjamin Tal on inflation, interest rates, and CRE
The Bank of Canada is attempting to convince people it’s serious about decreasing inflation, which reached 6.9 percent last month – the highest rate in 31 years. CIBC managing director and deputy chief economist Benjamin Tal told an audience at the June 7 Land & Development conference at the Metro Toronto Convention Centre, however, that rising interest rates should be at least as big a concern. The Bank of Canada increased its policy interest rate by half a percentage point on June 1 to 1.5 percent as part of its effort to get the inflation rate back to its two percent target. "Two years from now, inflation will be two percent," said Tal. "It’s not about inflation. It’s about the cost of bringing inflation back to two percent in terms of high interest rates." Capping interest rate at 2.5 percent Interest rates are expected to continue to rise quickly and could hit three percent by late this year or early 2023 and according to some market forecasts could even hit 3.5 percent. "Just because the market is expecting it doesn’t mean that the market is right," said Tal. "The market can be wrong and has been wrong in the past." The Canadian housing market is slowing down rapidly and Tal believes it will soon be balanced, which is a good thing, and that will be followed by a buyers’ market. "I need to see inflation starting to behave and the housing market slowing in order to make the point that there’s no need for interest rates to go beyond 2.5 percent," Tal said. "I can tell you that the difference between 2.5 and 3.5 percent is the difference between no recession and a recession. It’s as simple as that." Tal expects rents to rise at a faster rate than home prices over the next few years after homebuyers benefited from several years of very low interest rates. "When you accelerate activity, you borrow from the future and the future has arrived with interest rates rising," Tal explained.
Energy costs and inflation Tal said the war in Ukraine and continuing deglobalization are inflationary, and moves by European countries to cut or eliminate their dependence on Russian oil and gas are driving up global energy prices. Economies are experiencing an "oil shock" and Tal said responses to oil shocks lead to recessions via higher interest rates. Economies are, however, less oil-intensive than in the past and dependence on the fuel is falling. "Our susceptibility to higher oil prices has diminished over time, and that’s a good thing," said Tal, who claimed not to be losing sleep over energy-induced inflation. "Oil prices are rising, but investment in Alberta is not rising. "This is the first time we’ve seen something like that." Rising costs are curtailing development Tal said rising development charges and taxes, as well as the introduction of inclusionary zoning regulations in some markets, are compounding the difficulties caused by rising construction costs and labour shortages. Developers’ profit margins are shrinking due to construction costs rising faster than inflation and home prices, and this is leading to cancelled or postponed projects. That means thousands of badly needed housing units aren’t being built. "We need a rental solution to this crisis," said Tal. "We need a purpose-built solution. "We need to support this industry as opposed to punishing it. I fear that the next two years will remove the sense of urgency to do something about it and that’s exactly the opposite of what we should be doing." Please find the full article here.
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Shael Soberano, CFA Konfidis Inc. Chief Investment Officer
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