Canadian Housing: How Bad Will It Get?
Exploring the topic of, “Canadian Housing: How Bad Will It Get?” with internationally renowned macro strategist, Harvinder Kalirai, and one of Canada’s leading residential realtors, Christopher Invidiata, along with Joseph Abramson, Northland’s Co-CIO.
Issues to be discussed on this webcast include:
• How to survive the coming real estate bear market
• Lessons from past real estate downturns
• Critical buyer/seller strategies that worked in 1990s
• Current psychology of the real estate investor
Harvinder Kalirai is the Chief Global Fixed Income & Currency Strategist at Alpine Macro. He is widely viewed as one of the world’s leading macro strategists. Past positions held include: Head of Currency Management at CIBC, Head of Currency Research at State Street in Australia, and Analyst at the Bank of Canada.
Christopher Invidiata is one of Canada’s leading realtors, operating via The Real Brokerage platform. The Invidiata Team has sold more than $5 billion in residential real estate since 1985 and has been named the number one RE/MAX team in Canada 15 times. The Invidiata Team was also the number one RE/MAX team worldwide in 2007 and 2012.
Make sure to check Northland Wealth’s YouTube Channel for more episodes.
Joseph Abramson, Harvinder Kalirai, Christopher Invidiata
Joseph Abramson 0:14
Welcome to the Artisan podcast where we share insights from some of the world's leading minds. Today, we will look at the Canadian housing market with Harvinder, Calgary, and Christopher Invidiata. Christopher, is at real brokerage and is one of Canada's leading residential realtors. And he's seen a couple of cycles plying the trade for nearly four decades.
Harvinder is currently the global bond and currency strategist for alpine macro. Before that, we worked together for over a decade at BCA and I can honestly say he is one of the brightest and most thought provoking strategists I've ever known, and joy. So just reading the papers, it seems like the banks are falling over themselves to see who can be the most negative. RBC, for instance, is calling this the steepest decline and half a century. Not to be outdone, TD is predicting a 20 to 25% decline in residential real estate prices. So Harvinder are they all in the mark are out to lunch?
Harvinder Kalirai 1:21
Well, I do agree with the general outlook, that housing is going to have a downturn and there will be some decline in prices. The issue for up for debate is whether it's going to be you know, 10, 15 20%. And also, you know, as we say, real estate is local. So some markets can experience much sharper declines than other markets, some markets could be flat, some markets could experience, you know, 25% declines. But I do agree that housing is in store for some weakness. And the from a macro perspective, the cause is fairly simple, we have a combination of rising interest rates and a central bank, that's likely going to push the economy into a recession. So that's another way of saying that there's going to be job losses and the unemployment rate is going to rise. So you take the two together, declining jobs, rising interest rates, that usually spells trouble for the housing market. To me, the bigger issue is not whether housing is going to decline, but whether it's going to pose a systemic risk to the economy and to the financial system, like we saw in the US and in parts of Europe over a decade ago.
Joseph Abramson 2:38
So I mean, on that note, you wrote a very interesting report, recently, which looked at the potential implications of the housing issue in Canada, and the potential for systemic risk, maybe you could give us some of the highlights of that report.
Harvinder Kalirai 2:56
Sure. So once again, to start off, there's bad news, housing is going to turn down. But at the same time, there's some good views in the sense that we don't need to have a repeat of the the GFC or, you know, as we've had, in the US and, and elsewhere. So on the the borrowing side on the on the household side, to start with the structure of our mortgage market is quite different from the way it was in the US.
First of all, to to to get a mortgage, you have to put down 20%. And if you can't do that, you have to take up mortgage insurance, lending standards were much more lacks in the US, there was no income verifications, mortgages were made for even more than the value of the house, and that was being appraised at ridiculous levels. We don't have that type of, of crazy lending practices, there's a lot more prudence taking place. Also on that we also have stress tests, you know, households, we're not they don't get a mortgage based on the posted rate or even a discounted rate, they had to meet a higher threshold.
So there was a buffer built in where households were made to be able to withstand some rise in in borrowing costs. So that's on the borrowing side. And then of course, on the lending side, we have a banking system that's relatively well capitalized. There's minimum capital requirements, and then there are buffers on top of that. And to give you a little bit of a sense of the world capitalization, nature of Kenyan banks, I'm just going to read something we wrote it actually in our report. So the Bank of Canada did a study. I think it was earlier this year. And in that study, What the Bank of Canada found was that even in just quoting from our reports that even in a severe and Pathak protracted recession scenario, lasting six quarters, so a year and a half, were Canadian GDP contracts by 5.8%. And the unemployment rate reaches 13 and a half percent, house prices plunged by 29%.
So this is probably even more than the scenarios that you laid out from the commercial banks at the start of our discussion. Even if all that happens, the major commercial banks won't even come close to breaching the regulatory minimum capital requirements. So that's very encouraging. So as I said, you know, good news, bad news. Bad news is the housing market is going to slow down. But the good news is that it won't lead to a apocalyptic type of crisis.
Joseph Abramson 5:51
Okay, no, Armageddon, not so bad. So, um, that's a, you know, the top down perspective. And, you know, a little bit later, we'll get more into, you know, interest rates and the economy, because those are, you know, very big macro inputs into the outlook for Canadian housing. But what I'm really interested in is marrying the bottom up with with the top down. And, you know, Christopher, like I say, you have this wealth of, of experience, you've sold some of Canada's most expensive homes, you've seen quite a few cycles in the last four decades. What are your thoughts on the current market? Well,
Christopher Invidiata 6:34
The current market is long overdue to be corrected. So we couldn't continue with the way it was going because you are getting 20 to 30 bids on a property, you are getting 10, 20, 30% over asking. It was it was it was too crazy. And so the government did the right thing by introducing the higher interest rates to, to level out to tame the market. It's whether they're going to go too far in pushing this, the higher rates on the economy on the housing market. So there are voices that are shouting out there now, just to even stop raising the rates, because the effect it's already had in most markets, is it's corrected the price in some cases 10, 20, 25% already. So the effect that it has had, has been immediate.
So if you look back in history, the 80s, the 90s 2000, as rates were declining, the prices are just going the opposite direction. I bought my first home at 21% interest rates in 1981. I remember somebody saying to me, the mafia doesn't even charge 20%.
Joseph Abramson 7:54
I was on the other side of that, okay, I got to invest my Bar Mitzvah money at about 21%. I haven't seen that since.
Christopher Invidiata 8:01
No kidding. Yeah, awesome. So but the truth of the matter is, the engine that drives the whole industry is the mid market. The entry the mid market is is the the real market that we should be focused on. Because the luxury market, and I say luxury is really homes that are over 5 million. That's the true luxury market. Most of those buyers are not using the bank's money to buy. So they're cash buyers. Those properties that are in primaries are still being they're still being bought, they're very attractive.
I think people with money still believe in the principles of owning really good assets like real estate. And we have seen it here in Oakville for sure where we're getting multiple bids on like our lakefront, there's less than 300 properties on the water. And land value for one property just with listed for 10 point 5 million sold for 10.75. In this market, just the land. So, it speaks to the liquidity that is there for those that have money and where they're willing to put their money in. So real estate has been in real estate, it's been one of the go to investments, but more importantly, it's the prime real estate that they're going after.
Joseph Abramson 9:28
So I mean, on that, that's actually very interesting for Northland clients because they will tend to be on that luxury end of the scale. I'm not an expert in real estate. But what I generally have read is that almost all segments of the market are down in the Greater Toronto Area except the luxury market which really hasn't come off the peak yet. If you were Just looking at the luxury market going forward, do you think it's going to catch up? Or it's going to stay? Well bid? What are the thoughts in that segment?
Christopher Invidiata 10:10
Well, good question. It ties to stock values and in the businesses that these owners are actually operating. So if they start to see their stocks declining, or they start to see their business, that whatever business they're in, that they're running, they start to see it starting to slow down, and the curve of earning money goes down for them, they may put the brake on a buying the luxury properties, and then the luxury market will start to come down.
Joseph Abramson 10:39
Interesting, interesting. And I'm gonna put gun to head here, you're the professional, if you looked at this market, from everything that you know, and there are some uncertainties in terms of the economy and interest rates. What would be your your base case, in terms of the peak to trough decline, you can say that nationally, or you can just talk about Greater Toronto Area, that's kind of your, your specialty.
Christopher Invidiata 11:11
When you look back historically, it's usually the equity that the homeowners have that they're losing with the decline. So just before the power sales begin, and the real bleeding starts to happen, it's usually that 20% 25% 30% That I think as a whole, they look at and say anything more than that, we're not going to start having banks losing money on their on their mortgages. So it's usually the capital that gets eroded in these adjustments.
Joseph Abramson 11:43
Okay. So you would be more more along those lines, I mean, certainly, two of the experiences that I've had is that if you look at the bursting of the US housing bubble, which we were predicting before it happened, once you got a couple of years into it, like, I was looking for a place in South Beach, and I was waiting to pick my spot, I went to go see brokerage, looked at, you know, actual places. And basically what happened was, prices just went vertical in the bubble, and then stop going up transactions just stopped occurring. And you really just went from the bid to the ask, so there was a five to 10% decline. That's it.
It didn't happen in the rest of the country that way, because there was back for selling and bakes forcing others, you know, to, to sell. So So do you think that there could be that sort of dynamic in the luxury market, where, you know, just the transactions slow? Maybe you get a little bit of weakness? Whereas maybe in some other areas that are more economically sensitive, where the people can't afford their mortgage payments anymore? That you'll have greater risk? Or where do you see more risk at the high end? Or, in what you're speaking the middle market?
Christopher Invidiata 13:19
I think the mid market for sure. Okay. But in the luxury market, I think those that did borrow money to fund their purchase, when things are going to be you know, when refinancings involved are in mortgages are coming through rates, the rates are almost double now what they used to be, so those payments are real. And so if the homeowner is not able to make those payments, we'll start to see some bleeding in the in the luxury market as well, for sure.
Joseph Abramson 13:55
Okay, so maybe, you know, as I said, you know, it's difficult to make the housing forecast without the economic or, or interest rate forecast, and that's, that's really your wheelhouse. Harvinder. So, if you look strictly in terms of Bank of Canada, which is really in the shadow of the Fed, what's your interest rate outlook, you know, both on the long bond, which is not controlled by Bank of Canada, and, and short rates, which is largely controlled by by Bank of Canada? What are your thoughts there?
Harvinder Kalirai 14:32
I think that not just the Bank of Canada, but also the Fed are going to probably overdo it. It just comes down to legs. You know, might you change monetary policy today based on the economic data that you're looking at today. And you're not going to see the impact until down the road. And by the time you see that impact, it's very likely that the economy is already going to be in a recession. That's just usually how it how it plays out. And in terms of this, this downturn in housing, this is part of how the Bank of Canada is going to bring inflation down. And as Christopher said that, you know, rates go up your mortgage payments go up. And to make those payments, you have to cut spending elsewhere. And as he cut that spending elsewhere, that lower demand is going to lead to lower inflation.
So this is part of the adjustment process. At the short end of the curve, in terms of how high rates could go, I would say maybe three and a half to 4% of the policy rates, the bond, the longer rate is, of course, going to be much more market determined. And of course, we know markets tend to be forward looking. So if the markets begin to believe that, you know, a policy rate approaching 4% is going to trigger a recession, the long end is going to start to rally before that. So I think most of the pain at the long end of the curve is probably already behind us.
Christopher Invidiata 16:03
If I could just jump in there. Joseph was one of the things that I heard which I would love to get her into his view on as well. I've heard that in the states that are already talking about lowering the interest rates, because the the measurable effect has already been been filled. Have you heard anything towards that?
Harvinder Kalirai 16:21
Well, the market is pricing, what we call a dovish pivot by the Fed next year. So the way the curve is priced, the peak in the Fed funds rate occur sometime in the first or second quarter of next year. And then by the end of the next year, the market is pricing in a gradual decline in interest rates. So So yes, market expectations are that the Fed is going to overdo it at eventually we'll have to reverse course.
Christopher Invidiata 16:47
Okay, because I've had a lot of clients ask me whether they should go with a two year renewal a three year or five year lock in? It's probably the biggest question.
Harvinder Kalirai 16:59
Well, you know, if the US economy is back into a recession sometime next year, I would think that short term interest rates are probably going to be between zero and 1%.
Christopher Invidiata 17:10
Again, interesting, okay, so there's a good probability that mission accomplished, and they'll start to reduce the rates.
Harvinder Kalirai 17:18
I think the risk is that it's going to be beyond mission accomplished, it's not going to be a soft landing, it is going to be a recession. And if it was a soft landing, and its mission, mission accomplished, you get to a nice steady state and interest rates don't need to decline too much. But if they overdo it, rates gone up too high, then on the other side, they're going to have to reverse course, a lot more as well. So, rates don't go back to some steady state, they have to go below a steady state level to stimulate the economy out of the recession.
Christopher Invidiata 17:47
Joseph Abramson 17:49
And so as opposed to the US, you know, Bank of Canada, we were quite some time ago, you worked Harvinder. We'll look at a monetary conditions approach. So, we're a small open economy. So, the currency is important, as well as interest rates. What are your thoughts in terms of the currency? Will? Will the currency offset some of this tightening of the you know, the weakening of the loonie? Or do you think it's going to help them tighten? So, they don't have to do as much? What are the thoughts in terms of that dynamic?
Harvinder Kalirai 18:27
Great question. So right now, the Canadian dollar is actually quite cheap. According to our models. The two main drivers of the currency are interest rate differentials. And what we call the terms of trade is basically the price of the goods that Canada exports. And because commodity prices are relatively elevated, that is playing a role in pushing up the fair value of the Canadian dollar. But the Canadian dollar has actually lagged that improvement in commodity prices and in the terms of trade. So at current levels, the currency is actually providing a lot of stimulus to the economy. And it's going against what the Bank of Canada really wants. If the currency was much more in line with fundamentals, you know, rather than being where it is at about 130, we would be sub 120 versus the US dollar.
So I think relative to fundamentals, the currency is stimulative. And the Bank of Canada would need to offset that by pushing rates even higher than if the currency was was firmer. And a great example of that well, of the currency being so strong, a big so favorable is that our trade and current account balances are in a large surplus.
Joseph Abramson 19:47
That absolutely makes sense. I mean, it looks like it's more of $1 Move, right? I presume the dollar is going up against almost everything because people have I've been pretty scared and and worried about a global recession. When that happens historically, it's good for the dollar as the dollar goes up against everything, I assume it's, it's gone up less against the Canadian dollar than the euro, or the yen or anything emerging market currencies. Okay, so that's so basically, the weakening Canadian dollar means that the Bank of Canada on all of the things being equal has to do a little bit more.
Let's, let's switch back to the, to the bottom up, which to me is just fascinating, because I've done top down for most of my life. And, you know, basically everything you say, Christopher, is this a wonderful lesson for me? So in the current market, you're speaking to a lot of these sellers or potential sellers? What's the psychology like right now? What are they thinking about? What are they worried about?
Christopher Invidiata 20:58
It's kind of twofold. So, if the price of the property used to be, let's say, a million dollars, and now it's at $800,000, and they're going to say, Okay, if I, if I, it's too low for me to settle. If we were to say, look at if you get an offer on your home, and $800,000, you can put a condition in the offer, upon you now buying and making up that $200,000 somewhere else. So, all through the 90s, we had to find techniques, that would work in a declining market, which lasted as you might remember, almost seven years.
So, we always say to the client, how much cash do you actually want to keep aside after the transaction? And then are you buying up are you buying down? If you're buying up in a declining market, you can probably do better. If you're buying down, you're going to have to start looking in areas that are a little bit outside of where you thought you could live. But nonetheless, it's the amount of cash you want to have after and the differential which you're losing, because the price has dropped. So those two things really helped our homeowners get through the challenging turns that we're in now.
Joseph Abramson 22:12
And what if we look at the other side? What is what is the potential buyer psychology? Right now, I guess some people have dropped out. Because the interest rates have become too high, or the combination of rising interest rates and rising home prices, has really taken a whack out of affordability. And for sure. I mean, the charts are? Well, they're off the charts. So So if we look at the buyers, what sorts of buyers, Are you still seeing out there? And what is their psychology is their psychology? Oh, following market, I'm going to wait, falling market, all I'm going to do is put in a stink bid, and maybe something will come up. What are they thinking? And what are the buyer strategies? Right now?
Christopher Invidiata 23:07
Yeah, very good question. So the reality is, there's a lot of aggression in the mind of anybody right now, because of the reality of what the market is doing. And so sometimes, it's their affordability that we have to address. And sometimes it's just the regression, if it's the affordability issue, but they liked the home that they're now potentially going to buy. And let's say there's a gap between what the seller is willing to sell today, and the buyer is willing to pay or can afford to pay, we now look to the seller and say, Would you be willing to hold the note a second or third mortgage at 0% for two, three years, to enable the buyer to make the purchase? Well, the economy comes back and recovers. So we're gonna see a lot more of that.
Joseph Abramson 23:56
You have to be a little bit more creative than in the past. But But luckily, you know, you've seen these conditions in the past. So you you have a nice toolbox, available for how to manage through because, you know, I know for me, the reason why I bought a house a couple of years ago wasn't Oh, I like the president on it's basically like, within a short amount of time I had need for four extra bedrooms. Can't read that. You definitely can't write it in Toronto, Montreal either. So what about let's take a step back and and I'd like to hear I'll start with Harvinder and then I'll offer the same question to Christopher afterwards.
What are the thoughts in terms of fundamentals so leave the economy leave interest rates aside, you know, you hear all the stuff that, you know, new hoses built have been less than household formation or immigration or whatever, for a really long time. And and that got worse during pandemic because we couldn't build enough. So what are your thoughts in terms of the underlying fundamentals of supply demand?
Harvinder Kalirai 25:20
Sure. Thanks, Joe. I do think that from a demographic and building perspective, we do have a shortage of housing. I'll actually just quote you a study not that we've done but one from from Scotiabank.
So, so what the research shows is that Canada would need an additional 1.8 million dwellings to have the same number of housing on a per capita basis as the rest of the G7. So, 1.8 million. And to put that into context, in a normal year, there's about 200,000 of you housing starts. So, to catch up, just to the current deficit, will take years.
And of course, that deficit can grow just from the perspective that our population is growing. Canada actually has some of the best demographics in in the G7 is not due to, say natural domestic conditions, due to high fertility rate, it's due to our immigration policies. But nevertheless, it is leading to one of the if not the strongest population growth of all the G7. And we're starting from a deficit. So, I think that the long-term supply dynamics are quite bullish for housing, demand is going to continue to grow, and the supply isn't there. So, this correction we're seeing is basically just not a cyclical pullback.
Joseph Abramson 26:57
And certainly, you know, in a post Trump era, for the sorts of, of immigrants with, you know, engineering degrees and advanced degrees that are going to start a new tech company that's going to end up hiring 100,000 people, Canada is much, much more friendly to those demographics, you see it in terms of the overall numbers, and you see it in terms of actually speaking to students, and, you know, the US is 10 times larger than us. So, if there's that shift, that can really help the long-term growth for Canada and, and Canadian housing. Christopher, any insights from a fundamental perspective?
Christopher Invidiata 27:53
Well, I think we've all learned that cities get overpopulated and everybody's cramming into the one spot, and then leaving the rural, small towns without people. So, I think there could be a call to action to say to the governments of the small towns and mayors to say, take 100 acres in your small town, create another village of 100,000 people around your town so that you can start building the shift away from the urban center out back out to the rural pockets, and with technology today, and we learned to COVID people stayed at home. If you start to reinvest in rural living, but, do like small villages like they're doing in England, there's a project that I think that was 10 villages in England of 100,000 per, and the government gave the land as the base, but they brought the housing prices down I think was like 400,000 Euros. So, if you want to correct the problem, you have to give the solution and being in an urban environment. It's very hard to do that. So, I think there's a call to get people back out into more of a rural setting.
Joseph Abramson 29:12
Sure, I mean, again, not an expert from but from everything that I hear and see the restrictions on zoning, whether it be environmental or affordable housing, or what have you, in urban areas are increasing, not decreasing. So, I think if government could get together all its levels, which is actually easier to do in Canada, than in the United States, because the cities are part of the province.
The province can say you're doing this, and they have to they can't really do that in the US. Then I think that, that that's the solution, but there is no that solution. won't have an impact in the next six months. But from a long-term perspective, what you say makes a tremendous amount of sense. And, and, and hopefully, things will move in that direction. It's a win-win for everybody. Um, any kind of thoughts on multi residential, that tends to be where most of our clients are invested. But besides their personal house any kind of thoughts on multi residential Harv?
Harvinder Kalirai 30:38
No, that's too micro me, I'll pass it over to Christopher.
Joseph Abramson 30:42
He might know. He doesn't do that either. I don't know.
Christopher Invidiata 30:45
Joseph Abramson 30:52
Yes. So multi residential is when you say that you mean like condos, apartment buildings, or it could be condos within a condo building?
Christopher Invidiata 30:56
Right? Exactly. Well, there's been a tremendous amount of wealth created by investors who have bought not just one, but maybe three, four or five units in a building and participated in the rental pools. They get the appreciation by the time the buildings built on. So developers have relied heavily on the investor market to buy their products, lease out the units and become in like almost like car investors with them. And there's there's huge groups now that have been formed around this very thing. So that will definitely continue.
Joseph Abramson 31:35
Okay, any thoughts? not new at all, in the United States really was a big trend coming out of the global financial crisis, and has accelerated this idea of single family rental, which I read something that said, a quarter of new houses last year were bought by institutional investors to rent is that has that started in Canada? Do we see that institutional investment instead of buying a big building, you buy a whole bunch of houses,
Christopher Invidiata 32:16
It definitely has started. It's something that I think the public when they're aware of this is frowning on because it's now it's taking away the affordability again to another level. Yep. Yeah. But as as prudent investors have been watching the single family home market rising the way it has, because land is hard to get. They're now realizing that this itself is a great pool to be investing in and controlling. And so you'll probably start to see groups buying where I might be a Crowdfunder. So I might put in $1,000, or 10,000, or they'd be sold in units. But the idea of me owning my own single family home again, as a young person may not be there. It may be I'm part of these pools. And so this is this is a trend that's gonna start to continue.
Joseph Abramson 33:13
Very interesting. Yeah, that's, I presume in Canada, it's it's much more nascent than in the US. In the US, I see a lot of political risk to that strategy. Because it's, it's big, and it's definitely affecting the availability, or we're sure Don investors, and there's just, there's not enough and housing there is also very expensive here, I presume it's, it's more marginal, so it can probably fly under the radar for Well, for a little while. Um, so those are, those are my big questions. Harvinder Is there anything that I missed?
Harvinder Kalirai 33:53
I think you've got the big issues, Joe, you know, if I will just want to repeat or emphasize something I think we are, we are in the midst of a cyclical decline in housing. And it's healthy. You know, as Christopher said, you know, things just gotten too crazy. We need to reset, not just on the housing market, on the economy with very elevated inflation. So it's a nice natural resetting cleansing process. And it need not lead to a big collapse in the economy and the financial system the way we had in the US. And once the adjustment process works its way out. We'll start the next cycle from a healthier level.
Joseph Abramson 34:38
And what you Christopher, is there anything that I missed?
Christopher Invidiata 34:42
Well, one of the big things that I've been curious about is in Japan, they have what's called a century mortgage, where the amortization is 100 years and they had to do this because nobody could afford you know, I remember the Kramer with the dresser drawers Mr. You know, Every home in Japan is so small, because he can't afford it. So I see the need at some point to extend the amortization of mortgages in order to make them affordable.
Just because this is the new era that we're in prices, historically, whenever there's been a correction, they go down 10, 20, 30%. And then the next increase is higher than the last one. So I think if we're going to be facing higher prices long term over the next, let's call it 10, 20 years, we may have to start looking at a 50 year amortization.
Harvinder Kalirai 35:42
If I could just chime in there, Joe? Okay, well, certainly, of course, help affordability by making monthly payments, more manageable for people. But at the same time, you know, you're stimulating demand in an already overheated market, it's not the long term solution. But the long term solution is on the supply side, we've got to get more supply more building, whether it's in the cities, greater concentration, or we got to build these new villages. As Christopher was alluding to, the policies that keep stimulating demand are not the long term solution.
Joseph Abramson 36:20
I think you maybe you've hit the nail on the head Harvinder, because I'm rate increases are a blunt instrument, right. And so because of the nature of inflation, there had to be some substantial and quick rate increases. And one of the impacts of that is the new housing supply. And those things that are permitted, but in the development stage, that it stopped. They've, they stopped much of that development.
So I think that you're, you're both right, in the sense that the solution to this won't be so much of a Bank of Canada, it will be a government government saying, hey, let's work together. And let's get permits in some of these smaller towns, where land is still cheap. I mean, Canada has a ton of land, anyone with global warming in the Northwest Territory, we're all set, you know, or some of the things in terms of just, you know, building and permitting, which a lot of parts of government tried in the US and Canada over the last cycle.
It just, it didn't work that well, but but I think it's it's a government solution. You know, interest rate increases are blunt. And so if I looked at how it impacts the whole economy, the housings gonna get hit the hardest, because it's the most sensitive, and coming into this, you know, home prices to rent home prices to income. I mean, they took us 2000, seat six housing bubble peaks a long time ago, and we just kept, kept going. So I think I have to say, it's a supply, it's got to be a supply solution. And then maybe pandemic has made it so that not all the immigrants will want to go to downtown Toronto and Vancouver core. And that, that could from a demand perspective that could also speak to, you know, your your vision of the future. Christopher, any other thoughts on how we might get out of this?
Harvinder Kalirai 38:58
Well, I wish we had more sensible government policy. So but unfortunately, I don't see that we're having an election here in Quebec. And I forget which of the parties it was, but one of them wanted to put a pause on what we call the welcome tax, which is the land transfer tax for first time homeowners.
So all this stuff does is again, just stimulates demand, but they're not having any policies to increase supply. So they do a lot of lip service that we want to build more affordable housing and going into this and that, but we see very little of most of the policies that we see is just to keep stimulating demand to be able to afford these higher prices. And once you just keep pushing up that home coverage,
Joseph Abramson 39:43
It's self limiting. How about you, Christopher, any other law besides?
Christopher Invidiata 39:50
Well, I think, sorry. I think the stress test had its place when rates were really low. So the the stress test, I think should be off the table, I think if the banks pulled that off right now, because the rates are high enough, if you have to add two more percent, to you the ability to afford the renewal on your mortgage or a new mortgage, I think that taking the stress tests away, will will actually give some relief to those that are trying to borrow and make their mortgage payments.
Harvinder Kalirai 40:28
If I could just add, you know, I think the risk if of that policy is that if you take something away, you're going to keep the economy hot. And what that would actually mean is that the Bank of Canada will have to raise rates even more. So you're giving something to homeowners by getting rid of potential homeowners by removing the stress test. But on the other side, you're gonna get a Bank of Canada, that's probably going to be raising rates more. And they're going to offset each other
Christopher Invidiata 40:52
Good point. Yeah, there we go. So keep it in just once they see the curve happening, then they'll moderate or potentially bring rates down, I would hope in a couple of years.
Joseph Abramson 41:07
Okay, so maybe just to summarize the discussion today, which which again, it's just, it's, it's really unusual to see such a strong and well spoken perspective from the bottom up and from the top down, together, because usually you see one or the other, it seems like there's a consensus that the next year or so is going to be pretty rough, because the Bank of Canada is going to probably overdo it. And even right now, from Christopher's perspective, the various things on top of the Bank of Canada make financing already difficult, that we are likely to end up somewhere between a mild and let's call it more than mild price decline over that period, but unlikely to run into the sort of self feeding disaster that we saw in the US 15 years ago, because the banks should be able to stay safe, which ends the vicious cycle, which actually the same thing also happened in Europe in 2012.
So things act differently without a banking crisis, they're a little bit more like the luxury market where things are fundamentally driven rather than massive for selling, begetting for selling. And that if we look beyond this, one or two or three year period, the intermediate term outlook looks pretty good. Because we fundamentally don't have enough housing supply to match past demand, not to mention that the acceleration in immigration that we're seeing in the current government, and the fact that all of these super smart tech immigrants are no longer interested in going to the United States, they're much more interested in coming here. So, you know, there will be a point maybe we'll have another one of these in six or 12 months, when we can say, backup the truck, it's time to buy because the long term outlook is is pretty positive. How does that sound guys?
Christopher Invidiata 43:40
That sounds good. Oh, good.
Joseph Abramson 43:43
Thank you so much. I was it was really fantastic. I think our clients are going to get a lot out of this. Thank you so much.
Harvinder Kalirai 43:53
Thank you, Joe.
Christopher Invidiata 43:53
Thank you, Joseph. Thank you, Andrew, nice to meet you. Likewise. Thank you. All the best.
Canada market, housing prices decline, interest rates, economy, terms, mortgage, Bank of Canada, Government Policy, recession