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Market Update: Navigating Housing and Economic Trends

In the ever-evolving landscape of Canada's economic climate, it's crucial to stay informed about the latest developments. As we delve into this market update, we'll explore key factors shaping the financial horizon, from inflation trends to central bank policies and everything in between. We begin with crucial updates on the housing market, followed by insights into broader economic factors shaping Canada's financial landscape.

Housing Market Under Pressure: Over the next six months, we anticipate increased pressure on housing prices, with more listings but fewer qualified buyers. Affordability remains an ongoing concern.

Unseen Population Impact: The foreign student population is underestimated by approximately 250,000 individuals. Many report their home country as their primary residence, despite living in Canada, and some stay beyond student visa expiration, resulting in an additional 750,000 people unaccounted for.

The Housing Conundrum: Without effective government intervention in the housing market, potential outcomes include rental strikes, civil unrest, and increased anti-immigration sentiments. While measures like removing GST on purpose-built rentals offer some relief, projects, both rental and owner-occupied, continue to face lengthy delays, exacerbating the issue. Now, let's delve into the broader economic factors that are intertwined with these housing challenges.

Inflation, the Lagging Indicator: Inflation, often considered a lagging indicator, reveals its effects with a delay. This means that changes in economic conditions precede noticeable shifts in inflation rates. Understanding this is pivotal as we navigate the financial seas.

Bank of Canada's Dilemma: The Bank of Canada faces a tough decision: a recession or high inflation? Across the globe, central banks are known for their commitment to fighting inflation. However, the BoC is willing to overshoot its targets, even if it entails certain economic risks. At present, there's an 80% chance of the BoC overshooting its objectives.

GDP Woes: GDP per capita has taken a hit, currently down by 3%. It's a critical indicator of economic well-being, and this decline raises questions about the road to recovery.

Immigration and Savings Buffer: Canada's economy has been buoyed by immigration and approximately $165 billion in excess savings. These factors have provided a much-needed lifeline during challenging times.

Credit Over Savings: Savings have dwindled, leading to an increased reliance on credit. This shift impacts monetary policy and has led to discussions about potentially higher interest rates.

GIC Appeal: The allure of Guaranteed Investment Certificates (GICs) offering over 5% returns has prompted even those with savings to opt for investment over spending. This trend hasn't been seen in years.

BoC vs. US Fed Reserve: The spread between the Bank of Canada and the US Federal Reserve currently stands at only 25 basis points, a departure from the typical 75 basis point spread with Canada having lower rates.

Inflation Dynamics: During the COVID-19 pandemic, 80% of inflation was attributed to supply chain disruptions, which have since been resolved. Today, the majority of inflation is demand-driven, affecting the effectiveness of monetary policy. Retailers are also feeling the pinch as profit margins shrink.

Labour Market and Wage Growth: Approximately 80% of service costs are tied to wages. Thankfully, the labour market is normalizing, leading to slower wage growth. Fewer people are quitting their jobs and changing industries, stabilizing the workforce.

Predictions and Rate Changes: Benjamin Tal -Managing Director and Deputy Chief Economist

CIBC Capital Markets Inc. predicts that if month-over-month inflation exceeds 2%, a rate increase may occur on the 25th, with odds currently at 50/50. Expect the overnight rate to settle around 3%, a significant decrease from the current 5%, starting in June or July 2024. Time will tell if Mr. Tal is correct.

Mortgage Renewal Pressure: A staggering 57% of all mortgages in Canada are set to renew in 2025/2026, necessitating rate reductions to avert potential economic challenges.

As we navigate these shifting economic tides, it's essential to stay vigilant and adapt to the evolving financial landscape. Factors such as inflation, central bank policies, housing challenges, and population demographics will continue to shape Canada's economic future. If you have any questions or a topic you'd like me to cover next send me a note and I will happily dive into it for you. Stay tuned for further updates as we monitor these trends closely.


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