Top Economist Weighs In On Rate Cuts

[00:00:00] Welcome to the Canadian Real Estate Investor, where hosts Daniel Foch and Nick Hill navigate the market and provide the tools and insights to build your real estate portfolio. Welcome back to another episode of the Canadian Real Estate Investor Podcast, Canada's number one real estate podcast. My name is Nick Hill. I am a mortgage agent and a real estate investor.

[00:00:24] Joined today and every Tuesday and Friday by my good friend, real estate chart lover, Mr. Daniel Foch. Dan, what's going on today? Not much. Bank of Canada dropped interest rates 25 basis points today. They put out there, if you follow any realtors on Instagram, you already know this. So thank you, realtors, for your service. I don't know where else I would have got that information.

[00:00:48] But, you know, what's often overlooked by the industry is that they put out this thing called the Monetary Policy Report. So we're going to talk a little bit about that. And then we're also going to talk about, we're going to do an interview with somebody who's far smarter than me when it comes to economics, who did a report that we've referenced on the show already called Housing Outlook A Long Way Home. It was a January 10th report from BMO Economics by a guy named Robert Kavsik, the senior economist.

[00:01:14] He's one of my favorite people to talk to about real estate in Canada. So we'll get into that in the second half of the show. Yeah, Rob was just an absolute pleasure to interview such a wealth of knowledge of that guy. And Dan, I think he enjoyed the compliment when you told him that he had created what might be your favorite chart, I guess, for econ chart nerds. That's probably quite a nice thing to hear.

[00:01:40] So stay tuned. We just have a couple of things to get through before we jump into that interview. Dan, you had the opportunity this morning. And when I say this morning, you guys are listening to this on Friday. We recorded this on Wednesday, January 29th, when the Bank of Canada made its sixth consecutive rate cut. As Dan said, if you even have one realtor on Instagram, you probably know that. What I would like to hear more about, Dan, is the monetary policy report that you just mentioned.

[00:02:08] And any takeaways you have from that or if you were able to comment on anything about the BOC presser? Yeah, so the big things are really that GDP, their expectation is that GDP will continue to grow, yet the population will, growth is going to slow. So your GDP per capita, which has been a metric that's really looked bad for Canada for a while, could start improving. And so that might actually, even if we're in a recession, it might actually feel less horrible for Canadians over the next little bit.

[00:02:36] The other part is that in regards to residential investment, they've forecasted a couple of like pretty strong kind of, I guess, recovery scenarios that are taking place for what we could see for residential investment, which again is ownership transfer costs. So real estate commissions, new construction and renovations. And so there's a chart, chart three in the report residential investment is on track to strengthen in the fourth quarter of 2024. Again, even those out in 2025, they're using final quarter data.

[00:03:06] So you saw new construction, we've seen a big jump up in its contribution compared to Q3, where basically you saw no new construction contribution to GDP, seeing a ton of it in Q4. And a lot of that is that purpose built rental housing supply that we've been talking about a lot on the show. And then you're seeing basically a doubling in real estate commissions, ownership transfer costs. And that's because the real estate market is seeing more transaction volume. Again, people always think I'm trying to sound bullish when I say that, but I'm not.

[00:03:36] It's just there are more homes trading hands simply because people can afford them again. So if anything, prices being low is what's caused that. And if prices stay low, we can continue to see that. Renovations is the one that really stood out to me as not seeing a lot. Wow. Yeah, almost nothing there. Crazy. Not going to see much growth in renovations as a contribution to residential investment. They expect residential investment to strengthen in 2025.

[00:04:04] So it looks like a pretty substantial jump up in 2025. Yeah, so like a five to between five and 10% growth rate in residential investment. But then it kind of slows down, right? And that doesn't mean that you see less residential investment, but it means that it just is growing at a slower pace, right? So those are the big standout things. Would that account for, Dan, all those studies that we've looked at, one of four Canadians plans on buying and investing in real estate over the next five years.

[00:04:33] We've seen an exodus of real estate agents and mortgage agents from the industry. So maybe less people making more money. Does that kind of, is that what's impacting these numbers here? Yeah, I think so. I mean, I think really like it's, yeah, it's mostly just, you know, I think a big piece of the residential investment kind of ramping up too is prices being lower, rates being lower, right? People are thinking like we heard about those people on the sidelines.

[00:04:59] And in our interview with Rob kind of talks about this, you know, he's saying for your end user buyer who is, you know, who's maybe, you know, thinking about buying a home for more qualitative purposes.

[00:05:11] A lot of those people are thinking about buying again because their monthly costs of owning, of buying that house is much lower than it was however long ago, you know, a year ago in 2022 when prices were high or in 2023 when prices were lower, but rates were still high because of the Bank of Canada.

[00:05:32] And so we are seeing those qualitative buyers begin to reenter the market because they have a much longer time horizon and they aren't as quantitatively dependent on the numbers working. And we kind of dive into, you know, he's not necessarily seeing a recovery for the real estate market per se or for the investment market per se because your buyers who have a quantitative dependence on the market, investors like us, will need rates to be lower in order to substantiate cap rates, especially with rents falling.

[00:06:02] So he really gave us a good analysis on kind of the different factors and opportunities and risks for the real estate market. Yeah, for sure. You know, he did a really excellent housing report and that's what kind of sparked this whole thing. And some of the questions that we ask him that we go through are things like, what can we expect over the next few years? How long are we going to be on this trading sideways path? You know, we just saw another rate cut.

[00:06:29] How is that going to affect and impact the relation to the economy, to residential investment, to real estate? You know, we poke him on things like rents falling and have we hit the bottom yet? And then we close out with getting him to really shed light on what Rob and his team have come to the conclusion of what are the next risks and the next opportunities here in Canadian real estate.

[00:06:52] Dan, one of the fascinating things that I got from this was Rob's take on single family home investment, which we don't talk a ton about on the show. I know it's huge in America and went through a big phase with the iBuying stuff and, you know, BlackRock buying up all the single family homes. But it was really interesting to hear his take on why that would be a good investment. Anything else to add, Dan, before we jump into this interview with Rob Kavsik? I think he made a very strong case in that regard.

[00:07:19] And, you know, I mean, if the only way that investors like us can really substantiate making investments is by buying multiple units, then the only thing that's going to get housing supply created is multiple unit format. So his claim that, you know, the single family home will continue to become more and more scarce is empirically verifiable. Like you can see it's just math at this point.

[00:07:40] If you and I, Nick, are multiplexing everything and taking single family homes and turning them into duplexes and triplexes, then that's one home, one single family taken away. Or if we're tearing them down and building 10 unit or 60 unit buildings, that's another one taken away. And so, you know, that's a good way to think about it. My question is whether or not consumers can afford the prices. And that's kind of what keeps me fearful of really like feeling like there's a recovery.

[00:08:07] But I think like his assessment on the single family detached home is he makes a strong case for sure. So let's dive into it. It was a great interview. I loved it. We had a couple of technical difficulties. So if it reads like the context is kind of shuffled, then that's why. But honestly, one of my favorite people to talk to in regards to the Canadian housing market. Thank you so much, Mr. Rob Kavsik, for joining us.

[00:08:33] You may know Rob from a lot of the amazing data he puts out. He is the senior economist and director of economics at BMO. So, Rob, thank you so much for joining us today. Dan and I have referenced your research and insights multiple times over the last few years. So it's an honor and a pleasure to have you here with us today. Yeah, thanks for having me, guys. Happy to do it. Great. Why don't we start off really quickly? We've got some really great questions for you here.

[00:09:01] Bank of Canada rate cuts, opportunities in the market challenges, all that kind of stuff. Before we get into the nuts and bolts, give us a little background on who you are and maybe why we should be asking you some of these kind of harder questions. Well, so as you mentioned, senior economist, Bank of Montreal. So I spend most of my days just covering the Canadian economy, Bank of Canada policy. And I spend a lot of time on housing and Canadian real estate. That's kind of one of the areas I specialize in within the team.

[00:09:31] I've been doing it for a while. How long has it been now? Going back probably, well, at least the last decade. We've been very, very bullish on Canadian housing through a lot of those times when we had a lot of people calling it a bubble. And we had a lot of U.S. investors looking to short Canada because of our quote unquote housing bubble. And it was not. It was nothing anything like that. And so we were really bullish over that period, which maybe gave us some credibility.

[00:09:59] And then we also kind of came out in early 2021 and said, look, things are going off the rails. Bank of Canada needs to tighten policy and stop this. And unfortunately, they were about a year or so too late. And we kind of saw what happened with a lot of the froth buildup in the market. And we're kind of dealing with the consequence of that now. So, I mean, that's my background and some of the views we've had going back over time. And that's where we are today. Amazing. So, we are going to start to tap into that crystal ball that you and your team over there may have. I'm kidding, obviously.

[00:10:29] But you guys put in so much work and look at so much of the data that, you know, I think one of the reasons we wanted to have you on, especially right now, was we had recently looked at your analysis of the Canadian housing market and past correction. So, I know, Dan, you have a question on that. Why don't we use that to kind of kickstart the conversation here? Sure, yeah. So, you made this chart that I wish I made, but it basically has, it's one of my favorite charts I've ever seen.

[00:10:56] It has all of the housing corrections mapped on top of one another. And it looks like kind of we're pretty close to the worst scenario that we've seen other than I think Vancouver's 1990s. So, I was born in 1991. Nick was a little older. I think he was four or five in the 90s. So, he was probably, you know, participating in the real estate market a little bit more there. Yeah, same time. But I wasn't.

[00:11:20] So, you know, can you tell me kind of like how we compare to that scenario based on your analysis? And what Canadians should be expecting based on, you know, comparison to past housing corrections that we've seen? Yeah, sure. So, I was participating in real estate in 1993 or so, but I was a young teenager. My father was a home builder. So, I was dragging bricks and crap around his construction site when I was a kid getting paid with a can of Coke.

[00:11:50] But that's another story. So, the comparison is that so like peak to trough, like this is a very textbook housing recession so far, right? So, peak to trough, we've seen Canadian home prices fall like 15, 16%. We've kind of come off the floor a little bit. But Toronto, Southern Ontario has been a little bit worse, about like 18, 20% peak to trough. And we haven't really come off the floor.

[00:12:15] So, the first thing I would say is we tend to look at the Canadian numbers because that's what everyone quotes and that's what gets published. But Canada is, as you guys know very well, not really a real estate market, right? It's a collection of local real estate markets. So, if you were to look at that chart in somewhere like Calgary or like a Moncton or Halifax, it would look a lot different because those markets hardly budged during the downturn and they're pushing record highs right now. Vancouver would look a lot different too.

[00:12:44] The correction was pretty mild and we're maybe what, like 5% or 6% off the highs at this point. So, this is really a Southern Ontario story. And in that sense, we are tracking, as you mentioned, some of the tougher real estate corrections that we've seen historically going back to like the early 1980s. And so, the benchmarks would be that correction we saw in Vancouver through the mid-90s, yes. But also that 1990s downturn and really long bear market that we saw play out in Ontario.

[00:13:15] And so, we're not of the view that this environment is going to turn out to be that bad because a lot of things went bad during the 1990s that we hope don't repeat this time around. But at the same time, you got to kind of be mindful that a lot of things rhyme with the 1990s too, right? And just to point out a couple of things. One is, if you look at things like housing valuations and how stretched they were in 2021, very comparable to what we saw around 1990.

[00:13:45] If you look at what was driving the market through 1990, it was a lot of speculative activity, investor demand, and a big increase in immigration that then got turned off. Well, what are we looking at now? We saw a lot of speculative activity in the market, big increase in immigration that's now getting turned off. The other thing I would say is, if you step back and look at longer-term demographics, in about 1990, the baby boom was peaking at right around 35 years old.

[00:14:13] Right now, the millennial is peaking right around 35 years old. So, there are a couple overlays that kind of suggest that, look, this decade plus long run that we've seen in housing has kind of maxed itself out. And we're going through a period now where we're just going to kind of grind sideways for a long time. And I kind of say that, that's less bearish in the 1990s because as you work through the 1990s, a lot of bad stuff happened. Like we had a fiscal crisis, we had a currency problem.

[00:14:40] The Bank of Canada had to raise rates when they didn't want to and that kind of made that situation a lot worse. And hopefully, we don't go back there, but who knows? Yeah, it all sounds eerily familiar. Is that being a potential outcome? Yeah, sorry, Nick. I was just going to say, given the Bank of Canada's monetary policy report that came out today and their recent analysis on the impact of tariffs on potentially creating an inflationary scenario, do you see that being a potential like the setup that you described in the 90s?

[00:15:09] Is that something that we could see happen where we are dealing with a bit of a currency crisis or maybe rates having to not be as effective of a tool as the Bank of Canada might want them to be? That would be a concern for sure. So the backup in real interest rates through the mid-90s was pretty significant, right, at a time when the bank wanted to be cutting rates. So I don't think we're going that far. But look at the Bank of Canada today.

[00:15:39] They're talking about this 25% tariff threat and they're kind of sketching out the economic impact and the policy response of that. And they themselves won't come out and say that we're going to cut rates in that environment, even if we're looking at recession-like growth, because they're not sure how big the impact on inflation is going to be. Right? From a textbook perspective, we know if we retaliate with 25% tariffs, it's going to be inflationary to some extent.

[00:16:04] But they don't really know whether it's going to be such an extent that's going to prevent them from actually cutting rates. I would say at minimum, maybe like it keeps them from cutting rates as much as they want. But again, it's something they have to be very careful with. Is that because, I guess, if it is inflationary, it would result in a little bit of demand destruction? So people would buy less and then you don't know if it actually ends up being inflationary or perhaps disinflationary?

[00:16:30] Well, so they know there's going to be negative growth impact and they know there's going to be a positive inflation impact, right? So if we're a small open economy, we put a 25% tariff on U.S. imports of consumer goods and manufacturing equipment, stuff like that. That's going to pass through to the consumer. We just don't know exactly how much. And probably more importantly, we don't know what impact is going to be worse.

[00:16:54] The growth impact, which will be negative and cause them to cut rates or the inflation impact, which will be positive and kind of prevent them from cutting rates. I personally think that if this was actually going to happen, we would get a more significant growth impact and the bank would probably be cutting rates through 2025, even though they don't want to explicitly say it because they have to defend that inflation target. But I think that's the way it would go. Yeah, that's really interesting. So let's pause there and maybe talk about what just happened, right?

[00:17:22] We literally just saw this morning, we're recording on Wednesday, January 29th, the Bank of Canada made, I believe, its sixth consecutive rate cuts after the period of extreme rising in rates for quite a while and a little bit of a period of a break. And now we're seen to be on the other side of that roller coaster.

[00:17:41] Rob, how do you expect this to change things in relation to the economy in general, residential investment, the end user real estate market and an overall sentiment, which I think is obviously extremely important for the average community when they see the rates coming down, they probably immediately think relief. But what is the actual effect or the actual impact of a rate cut now after all these other cuts?

[00:18:11] Yeah, so those are good questions. I don't think the impact is all that much, to be honest. And I remember when this easing cycle started and there were a lot of people jumping up and down saying this is going to set off the real estate market again. And we kind of said, hang on, I don't think that's going to be the case for a couple of reasons. Because number one, like the valuations and affordability are still so stretched that these early rate cuts aren't going to really change the calculus much. But more importantly is that the market had already priced all of this in, right?

[00:18:42] So we saw variable rates cut 25 beeps today. But for the last year or so, the market through three and five year fixed mortgage rates has already priced all of that in. Yeah. Right. So if you look at what I tend to do is look at what's the lowest available mortgage rate out there. It's, you guys correct me if I'm wrong, but let's say like four, three or four and a half percent for five year fixed, somewhere in that range. Yeah. That didn't change today.

[00:19:09] And if we're coming off variable that was around 475, well, the lowest available mortgage rate today is still around four and a half percent. So I don't think it changes too much. What I've kind of been arguing is when I go through the arithmetic on just the affordability of a household walking into a bank and trying to qualify for a house to live in or for an investor from a cash flow perspective. And again, you guys probably have more insight on this than me.

[00:19:34] But when I look at like cash flow dynamics in a market like Toronto, four and a half percent boring costs don't work. When you get below four percent, maybe down towards three and a half percent, things start to get, I don't want to say like extremely positive, but they're not ridiculous anymore. Yeah. And we're not there yet, unfortunately. So I don't think this does a whole lot. It's still a pretty stable market. Yeah. It's funny, Rob. We recently titled an episode, Are We There Yet?

[00:19:59] Because I think that just seems to be the general, you know, when is this going to make a difference? Now, you mentioned the Toronto market. You mentioned, you know, investors and cash flow, which I want to kind of ask your opinion on as well. We're seeing rents in a lot of major markets across the country actually decrease for the first time in quite a few years.

[00:20:23] What's the correlation between what we're seeing in the market from a buy, sell, interest rate inflation standpoint and the correlation between these rents falling from your perspective? So the rent story is fascinating. And again, when we're talking about this, we tend to focus on Toronto and southern Ontario because that's where this market dynamic is most dramatic. There are, again, there are mentioned at the start, there are markets out there like Alberta, Atlanta, Canada, for example, where none of this really applies, right?

[00:20:51] Prices are rising and cash flow dynamics are better. So assume we're talking about, let's say, the GTA southern Ontario right now. I think two things are happening right now on the rental front. One is we've argued all along that the vast majority of the problem on this front was because of excess demand, not necessarily a lack of supply.

[00:21:12] It was 3% population growth, a million and a half people coming into the country on a yearly basis, 800,000 non-permanent residents. First thing you need is a place to live, right? And you guys know in real estate, supply takes years and years to get online. Demand can change in minutes. And so with the stroke of a pen, policymakers looked at the immigration situation and said, well, this isn't really appropriate.

[00:21:39] And with a stroke of a pen, they choked off those immigration flows. And so I think the bearish view that I have on rent for 2025 is because we're going to go from 3% population growth basically to about zero. Wow. At the same time that we're seeing record completions come to the market, either through purpose-built rental channels or a lot of investors that may be locked into a project in 2020, 2021.

[00:22:09] That's coming to completion and that was intended to be flipped. Well, you can't flip it without a big capital loss. So you're going to put on the rental market. That's going to add supply right at the time when rental demand is backing off. So I think rents are going lower still. Yeah, I'm of the same perspective. And I actually, I got lucky. I called this shot like pretty early when I saw rents rolling over in Q2. And I actually Q1 in student markets and then Q2.

[00:22:35] And I kind of forecasted that the government would, whether I'm right or wrong on this one, but I thought, you know, they're going to try and take credit for it with a policy because they have the data ahead of time. And they did in both cases with the student rental cap and then the non-permanent residents. But I think that the, and that kind of, the Bank of Canada put that chart out in their January monetary report last year where they showed rent inflation alongside population growth. And the correlation was pretty shocking.

[00:23:04] I guess then, you know, from, you know, our audience is mostly investors or people interested in buying real estate. And so I'm going to ask you the question that everybody hates to answer, but I've never heard anybody answer it as well as you did when we first spoke doing an interview for Better Dwelling, which is, you know, when do we get there? What are the signs that this is a market that's worth entering?

[00:23:26] Because I would assume that continued falling rents will materialize in prices continuing to fall based on, you know, if yields stay the same or if cap rates stay the same and rents fall, then valuations should go down with rents. If I'm an investor and I'm trying to time the market, which we all know is a fool's errand, but if I am and the market's going to go sideways for a little bit, what am I looking for? And what does the market show me over the next couple of years? So there's a lot to unpack here. So I would say...

[00:23:55] I'm good at asking questions with way too many questions, and then I apologize. So if you're like a whole... If you're a young family actually legitimately looking for a house to raise your family, the water is probably pretty safe now, right? Especially for a single attached house. We're down 15% off the high, and we might go sideways for a couple of years, but that's probably safe in most parts of the country. I wouldn't buy a one-bedroom condo in Toronto, but the rest of the market is probably pretty safe. You're asking about investors though, and I think we're not quite there yet.

[00:24:24] And the couple of things I would be looking at would be everything is a trade-off, right? So if you're looking at a property right now with, let's say, like a 4.5% cap rate, so we've probably backed up a full percentage point or so.

[00:24:38] But when borrowing costs are 4.5%, when you can go out and buy 10-year risk-free GOCs for like 3.5%, you're not being compensated enough for that risk to take on an asset that's very illiquid and has tenant payment risk and a lot of landlord tenant board issues and all that kind of crap. You're not getting compensated enough. So something has to change. Either long-term interest rates and borrowing costs have to come down further.

[00:25:08] And we're of the view that we're pretty much around neutral right now for interest rates and borrowing costs, right? So 3% Bank of Canada would be neutral. 3.5%, 3.75% for the 10-year would be about neutral. So if that's about what's normal, then cap rates have to change. Okay, so cap rates can change. Rents can continue to rise. Well, we talked about that. Rents aren't rising. They're falling.

[00:25:34] So how do you get cap rates up to a level that compensates you for the amount of risk you're taking to buy real estate? Well, prices have to come down some more. And again, I'll defer to you guys because you're literally out there in the market as we speak. But it seems like the investor is just absent because the cash flow dynamics don't make sense yet. They're not being compensated enough for the risk. And probably most importantly, you could look past some of that if prices were rising 20% per year, right?

[00:26:04] Like, okay, who cares what happens with rental? Just flip the place next year for 20% more. Well, that's not happening anymore either. So that side of the market is just not there yet. Yeah, as you said, Rob, I mean, I think what we're describing is really it's a tale of two cities or it's a tale of two cities, mainly probably just Vancouver and Toronto and surrounding areas versus the rest of the country. Because as you said, right, Dan and I are on our boots on the ground. We travel the country meeting investors.

[00:26:32] And it is, you know, the sentiment in, you know, a Red Deer, Alberto or Saskatoon or Halifax is a hell of a lot different than someone who bought three pre-construction condos in downtown Toronto and is now trying to, you know, flip them or get rid of them or assign them. And deciding, making that unfortunate, tough decision, do I want to lose money fast or slow?

[00:26:54] So, I mean, I guess just one more piece on that kind of multi-part question that Dan asked is, you know, are we close to that bottom yet? Are we on the bottom? And, you know, if we've hit the bottom, we're trading sideways, I guess, because, you know, again, going back to time in the market versus time in the market,

[00:27:15] is it better for someone to get in now or is there any reason to continue to wait on those proverbial sidelines we've heard so much about over the last little while? Yeah, like I would say the bulk of the risk is past, right? You didn't want to get stuck in 2021. I would have been like completely hands off in 2021. But because we're already off, like, again, it depends on the market.

[00:27:38] Because we're already off 10% to 20% and we're starting to stabilize a bit, I think it's like, it's closer to that point. There's no rush, though. Like in a market like Toronto or most of Southern Ontario, to me, it doesn't look like there's really any rush. And again, it's like you mentioned, we always have to condition this. We get in this trap of talking about Toronto and the dynamics here. It's a lot different in a market like in Alberta or Atlanta, Canada, or even Vancouver. For sure.

[00:28:08] So I'm not directly answering your question. That's okay. You're doing a very good job slightly avoiding it. I appreciate it. No, we're probably very close to the low. The thing I'm concerned with is in a market like Southern Ontario, that low is probably going to be with us for a while, right? And if you're not able to absorb some negative cash flow or some risk without prices really accelerating higher again, that's probably not a good environment for you.

[00:28:37] If you're able to just pick up quality property and just sit here in a tough environment for even if it's a couple of years still and not be stressed out about any kind of cash flow dynamics or anything like that, then yeah, you're probably closer to the bottom than certainly closer to the bottom than the top.

[00:29:20] Yeah.

[00:29:51] And at the same time where there's potentially an environment where the Bank of Canada can't cut rates as much as it wants to. And so that's the biggest risk that what was coming into this year actually a really good spot for the cycle gets kind of distorted by all of the potential trade headwinds that are coming at us. Yeah. Yeah, it's really interesting. Okay, well, Rob, one final question for you. We've talked about risk.

[00:30:15] You provided a lot of insights on a lot of different key components of the economy and the market right now. But I'd be remiss if I didn't ask, what are some of the key opportunities that exist currently or that you think will come to light in the near future in the Canadian real estate economy? I mean, we've seen things like apartment buildings and CMHC's Mli Select and the introduction of ADUs and financing for those types of products.

[00:30:44] From your perspective, where are the next big opportunities, whether it's from a market type or an asset class? I'd love to hear your thoughts. Well, you know, I still like single family as an asset class and I've been bullish on single family for like 10 or 15 years. Just simply because like when you go back to even – like go back to like the Ontario Places to Grow Act, it was like 2006.

[00:31:11] They literally said we're not building single family housing anymore, like almost quite literally. And since then, we literally have built next to none of it. And I'm talking like your traditional 50, 75-foot single family lots, right? So, yes, we're going through this cycle and yes, we have a ton of condo supply coming onto the market. That's swing down prices.

[00:31:31] But every year that goes by, those 50-foot single family lots get scarcer and scarcer and scarcer just because we're not developing them anymore. So, I still do like that. The valuations aren't great. Like it's really – the affordability mechanics aren't great for a young family. But we look at it five years from now, 10 years from now, they're going to be even scarcer than they are today. So, I still do like that longer term. And then markets outside Toronto.

[00:31:56] I mean, the valuations that don't make a lot of sense from an affordability perspective, that's not necessarily true in a lot of the other markets like Alberta, Atlanta, Canada, pretty much most of the prairies, parts of BC as well. A lot of those markets never got stretched. Now that rates are down, a lot of those markets kind of do make some sense again. So, again, I would distinguish between what's happening in Toronto and specifically Toronto condos with what's happening in even Toronto single detached and then markets outside of Ontario.

[00:32:27] I think different stories there for sure. Yeah, I couldn't agree more. I think the common misconception that a lot of people make is they hear real estate isn't doing well, but that's not the case. It's really just certain asset classes in certain markets that aren't doing well. And certain asset classes in certain other markets are killing it, right? So, final question here, Rob. Is there any kind of thoughts or takeaways that you'd like to leave with our audience that is across the country?

[00:32:56] And probably you're listening to the stuff that goes on in Toronto and saying, okay, thank God I'm not there. But maybe in my market, what should I be doing? Any kind of final thoughts, takeaways, or perspectives that you want to leave with us? I would just go like really big picture on this. So, in 2021, a lot of bullish factors kind of came together at the same time. And we can't repeat that, right?

[00:33:23] So, 2021, we had peak millennial demand domestically. We were coming into peak international immigration at a time when we already had massive domestic demographic demand. And at the same time, we cut real interest rates deeply into negative territory like we've never seen in a generation. And all that fueled the run-up in real estate. You cannot replace or replicate that again. Okay? Demographics are slowing down. Immigration is being capped. Immigration is being capped.

[00:33:52] And interest rates have normalized. So, that's kind of the takeaway, I would say, is that, yeah, we're probably going to find a floor and get back to valuations that make more sense again. But it's going to be really hard to go back and replicate the kind of run that we had in real estate the last five years, the last 10 years.

[00:34:11] And then, in that environment, the other thing I would say is that the neutral level for borrowing costs and in this context for mortgage rates is not too much different than what we see right now. And that's another big adjustment, too, for valuations or just the investor calculus, right? If you're sitting there saying, you know, I'll be fine when we go back to 2% mortgage rates, well, you're not going to get back to 2% mortgage rates unless we're in a recession, right, at this point.

[00:34:37] Because 4% or plus or minus 50 beeps around 4% is pretty much the normal now. So, two big things I would say from a macro perspective to keep in mind. We can't replicate those bullish conditions again. And borrowing costs that you put into your calculator, whether it's monthly carrying costs, cash flow, or just making comparisons to GOCs or dividend stocks, those neutral rates are higher now. Yeah. Fascinating. Completely agree.

[00:35:04] Rob, I want to thank you very much for taking the time, especially on Bank of Canada Announcement Day, to grace us in our humble little podcast here with your presence. Rob Kavsic, Senior Economist and Director of Economics at the Bank of Montreal. We'll talk to you soon, Rob. Thank you very much. Yeah. Thanks, guys. Anytime. The content of this podcast is for educational and informational purposes only. It is not intended as financial, legal, or investment advice.

[00:35:32] Always consult a qualified professional for advice tailored to your unique circumstances. The views expressed are those of the hosts and guests and do not necessarily reflect the opinions of affiliated organizations. Daniel Foch is a real estate broker licensed with Valerie Real Estate, Inc. Website is Valerie.ca, V-A-L-E-R-Y.ca. And a member of the Canadian Real Estate Association, the Ontario Real Estate Association, and the Toronto Real Estate Board.

[00:36:01] Nick Hill is a mortgage agent and partner at OWL Mortgage, license number 10317, agent license M21004037.