Globe & Mail - Jennifer Dowty

Inflation is at a multidecade high, negatively affecting corporate probability and consumers. Yet, inflation is a lagging indicator so I wonder if there’s the risk that the Bank of Canada keeps raising rates while economic growth is contracting, putting the economy at risk of a recession. Has there ever been a time when the Bank of Canada combatted inflation that was more than 5 per cent and there hasn’t been a recession?

Nope, that’s the point.

I look at four sources of inflation, but before you start analyzing any of that, you have to have a working assumption about COVID: We are in the process of transitioning from a pandemic to an endemic.

"If you look back in history, almost every time we had an oil shock, we had a recession immediately after."

Now we can analyze those four sources of inflation.

We’ll start with energy. If you look back in history, almost every time we had an oil shock, we had a recession immediately after. So the question is, to what extent is oil as inflationary as it used to be? So here we have three things. One, the shock that we are experiencing now is not as bad as in previous years in real terms. Second, the economy’s sensitivity to high energy prices has been reduced. If you look at the last 10, 15 years, energy consumption per unit of GDP is going down so we are more efficient. The other thing is the response from Alberta. In the past, the minute oil prices went up, oil executives in Alberta were very busy investing. That’s not the case now because everybody knows that green is replacing black.

The second source of inflation is the supply chain, and that’s a big one. If we are able to ease the restrictions on the economy vis-à-vis COVID then I think you remove a huge portion, maybe 60 per cent, of the inflation we’re seeing.

The third is rent inflation. If you look at the home price-to-rent ratio, it went to the sky. The combination of higher rents and lower home prices will help this ratio to go back to semi-normal. Higher interest rates will increase rental demand because people cannot afford to buy houses. We still have new immigrants coming. We have a lot of foreign students coming. We’re underestimating the number of people looking for units so the demand will be there. The supply is very limited, and more and more what we’re seeing is builders are not building because of the increase in construction costs. I had conversations with at least six big builders and I can tell you that big projects, especially rental projects, are being delayed or cancelled altogether because they simply cannot make money, the margins are squeezed.

The fourth source is the labour market – the wages. Wages are rising, especially among low wage individuals because that’s where the shortage is.




So where do you see rates headed?

The market is forecasting an overnight rate of 3.5 per cent by the end of this year. Our official call is that they will stop at 2.75 to 3 per cent. Now, in my opinion, the difference between 2.75 to 3 per cent and 3.5 per cent might be the difference between no recession and a recession. The enemy of the economy is not only higher interest rates but also rapidly rising rates.

The effectiveness of monetary policy in Canada is actually stronger than in the U.S. Per capita, we have more debt, which means that we are more sensitive to higher interest rates. Second, their mortgage terms are for 30 years, our typical terms are for five years or less so we are more sensitive, which means that the tiny Bank of Canada is more powerful than the mighty Fed when it comes to impacting the consumer. In those terms, we estimate that a 1-per-cent increase by the Bank of Canada is equivalent to a 2-per-cent increase by the Fed, theoretically speaking. So the Bank of Canada is more effective in its ability to slow down the economy and this higher sensitivity to interest rates might slow down the economy enough for the bank to stop raising rates at 2.75 to 3 per cent, assuming that the supply chain is behaving. There is a probability of 30 per cent or so that that will not happen and we might overshoot.

The housing market is very vulnerable to higher interest rates. If you look at some areas in the GTA and Vancouver, in the low-rise segment of the market, detached houses, prices are already down by 15 to 20 per cent. Prices will continue to go down, I believe. But remember, prices went up by 50 per cent in two years, so this is just an adjustment because we borrowed the activity from the future.




Canada's largest province is sticking with a maximum allowable increase of 2.5% for 2023 for rent-controlled apartments in Ontario despite a rising inflationary environment.  The Ontario government announced Wednesday the guideline increase, which is the maximum amount a landlord can increase rent during the year for most tenants without the approval of the Landlord and Tenant Board.

“As Ontario families face the rising cost of living, our government is providing stability and predictability to the vast majority of tenants by capping the rent increase guideline below inflation at 2.5%,” said Steve Clark, minister of municipal affairs and housing, in a statement. “We continue to look for ways to make homes more attainable for hardworking Ontarians while making it easier to build more houses and rental units to address the ongoing supply crisis.”

The Conservative Party, which won a majority government in Ontario this month, removed rent control for apartments built after November 2018 in their last term but the guideline still applies to about 1.4 million rental households.

The previous Liberal Party government had capped any increase at 2.5%, regardless of inflation.

The guideline is based on Ontario’s Consumer Price Index, a measure of inflation calculated monthly by Statistics Canada using data that reflects economic conditions over the past year. This would translate into a 5.3% increase by the Conservatives maintaining the cap.

Despite the increase at less than half of Ontario's inflation rate, the New Democratic Party lashed out at the 2.5% increase.

The rent cap is expected to disproportionately impact smaller rental housing operators, many of which are already struggling with significant increases in property taxes, utilities, insurance and building maintenance costs, said Tony Irwin, president and CEO of the Federation of Rental-housing Providers of Ontario, in an email.

The government's decision comes with rents rising rapidly in several Ontario markets. said that the average rental rate in the Greater Toronto Area in May rose 16.5% from a year ago to $2,327 per month.




Toronto’s red hot housing market continues to show signs of a prolonged slowdown after new data by Realosophy Realty found another monthly sales decline, while the cost of renting surges.

Home sales in the Greater Toronto Area (GTA) plummeted by 41 per cent in June from a year ago, while prices rose by 5.7 per cent on a year-over-year basis to reach $1.2 million, the data showed. Toronto’s home sales declines hit a fresh 20-year-low for the second consecutive month, according to a tweet by Realosophy Realty President John Pasalis.

Homes in the GTA were on the market for an average of 15 days and only 39 per cent were sold for over the asking price, the Realosophy data showed.

“It’s a pretty steep and rapid decline,” John Pasalis said in an interview. “Home prices should soon come down on a year-over-year basis soon, at least for low rise homes.”

Those GTA residents who rent also saw a spike in living costs as the average monthly cost to rent a home in the region rose 18 per cent to $2,843 in June, or roughly a $400 increase in rental prices over that period. 

Housing activity across Canada has cooled shortly after the Bank of Canada began raising interest rates at the beginning of the year. The Canadian central bank has set its policy rate to 1.5 per cent and is expected to increase it further next week.

“The data is a little bit concerning since we still haven’t seen the full effect of higher interest rates, but at least some buyers will reach home affordability,” Pasalis said.

The Toronto Regional Real Estate Board (TRREB) will release its homes sales and price data for June on Wednesday.



15 THORBURN AVENUE - TORONTO - $2,936,000 / $225,850 Per Suite / 3.25% Cap Rate

This is a house form frame building on a quiet residential street in Parkdale.   All bachelors (13 suites) but well designed and functional suites and the owner has kept 46% of the building empty for a new buyer to realized the rental upside of over 45% immediately.  The property was fully marketed by Commercials Focus Realty - The Apartment Group and the buyer was a private apartment investor who owned other properties in the area.

135 ATHERLEY ROAD- ORILLIA –  $13,250,000 /  $276,000 Per Suite / 4.00% Cap Rate

This is a three storey rental apartment investment on with a full basement partially above grade.  It is located about a 10 minute walk from the downtown and the water front.   The project was owned by Starlight and was well maintained and managed with over $800,000 put into the asset over the past 5 years.   The large 1.5 acre site had surface parking only and building contained 48 large suites with most being two bedroom.   There was over 35% of rental upside in the asset.  The property was fully marketed by Commercials Focus Realty - The Apartment Group and the buyer was a new investor group into the apartment vertical.

6 TISDALE STREET SOUTH - HAMILTON - $8,200,000 / $264,500 Per Suite / 4.65% Cap Rate

This property comprises two rental apartment buildings at Tisdale and King Street in the downtown of Hamilton.  The 4 storey buildings have been substantially renovated inside and out over the past few years.  Suites have been upgrade to condo quality.  The complex comprises of 31 suites most of which are 2 and 3 bedroom.  Average rent is around $1,500 per month which is strong for Hamilton and this location.  The property was fully exposed and marketed and was purchased by Encasa Financial.

111 COSBURN AVENUE - TORONTO - $7,730,000 / $336,085 Per Suite / 2.65% Cap Rate

This is a purpose built rental walk up apartment investment comprising 23 suites in East York.  The asset was well maintained with brick exterior, double glazed windows, flat roof and no balconies.  The building dates from the 1950's and has mostly one bedroom suites and over 55% rental upside.  This is a low maintenance building with hot water gas fired heating, bulk hydro and surface parking only.  Laundry is on site and the owners had this asset in the family for many years.  The asset is one property west of Pape.  The property was fully marketed and purchased by Dream who is also in the development game.  Perhaps some land assembly was going on here as well.





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