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Bridge Beat

Dec 8, 2014

Real Estate Forum – 2014 – The Optimists Have It

Over 2,000 delegates attended the 2014 Real Estate Forum to hear optimistic forecasts from two economists, one being Mark Zandi, Chief Economist of Moody's Analytics and the other Benjamin Tal, Deputy Chief Economist, CIBC World Markets Inc. 

Mark was fairly bullish on the global economy with some major pockets of problems, including Europe, Brazil and Japan.  The reason for his optimism is the continued growth of the U.S. economy, notwithstanding the projected rise in interest rates of another 3 points over the next 2 years.

The projected growth in 2015 up to 3.5% and 2016 up to 4%, a significant increase over the last two years of 3% growth.

Mark Zandi pointed out that the U.S. makes up over 20% of the global GTP and if it does well, then the spillover is quite significant for the rest of the world, including Canada, of course.

He confirmed that household debt has come down from 100¢ on the dollar, to 80¢ on the dollar, but equally important, the unit costs of labour has dropped dramatically to levels, particularly in manufacturing, that have not been seen for 25 years.

On the profit side, U.S. companies are making profits at a record level of 18%, with energy costs rapidly decreasing.

Benjamin Tal, in his usual amusing and entertaining presentation, described the U.S. and Canadian central banking policies as "Its complicated".  Any of you who have dealt with Israelis will understand that that is a standard response to virtually every problem that one faces in Israel from the political, to the business, to buying a dress.

Based on the growth in the economy, Benjamin felt that interest rates were inevitably going to rise. "The only thing preventing interest rates from rising is fear".  For the moment, the market leads both the Bank of Canada and the Federal Reserve Bank, not vice versa, the fear being that a material increase in interest rates will result in a significant drop in the market.

In Canada, the Bank of Canada consistently states that their policy is not to drive down the Canadian dollar, but with inflation being low and exports being significant, and new jobs being created, what other reason can there be, but to keep the Canadian dollar low, by keeping interest rates low.

Benjamin further pointed out that both the Federal Reserve Bank and the Bank of Canada have consistently used inflation as the reason for raising rates.  His point is that one has to start raising rates well before inflation hits.  As he said, "inflation is like a brown spot on a banana.  By the time you see it, its too late".  He refers to both the 1991 and 2004 recessions which resulted in spikes in the interest rates to curtail inflation, causing or exacerbating recessions.

At the end of the day, Benjamin was relatively positive on the Canadian economy, with the manufacturing sectors, particularly in Ontario coming to life and with oil prices coming down dramatically, this can only increase the health of the manufacturing industry.  Already, productivity has increased tremendously on the manufacturing side and as the U.S. economy goes, so does Canada's.

As for real estate, he pointed out that the world view of Canadian real estate is that there is a massive bubble waiting to explode.  He pointed out that he participated recently in a think tank involving over 35 major fund managers, where 2 hours out of 7 hours were spent on analyzing the Canadian economy and the real estate bubble.  He suggested that the true underlying factors that are driving the Canadian economy, including population, growth and immigration, reduction in mortgage debt by way of pay downs and the need for housing in those markets where the supposed "bubble" is occurring, are being ignored.  His view is that new condominium construction introduces an element of stability into the supply curve for both first time buyers, who would have otherwise been priced out of the marketplace.  That would explain why more and more people are staying put in existing homes and not moving up because the more expensive houses are becoming prohibitively expensive as well, and that is the reason why the rental market for young people is so strong.

At the end of the day, Tal reiterated the position that he has taken for the past year, which is that the Canadian marketplace is somewhat oversold, and prices could come down up to 10% next year, especially if rates rise.  Is there a "bubble".  "Definitely not". 

by Leor Margulies

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