BMO Real Estate Forum: Quebec Outlook
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BMO’s Commercial Real Estate team offers an insightful virtual discussion on the Quebec housing market, regional market trends and economic outlook. Featured panel speakers include:
- Sergio Callocchia: TP, ECA, ECCQ: Director, Cost Consulting and Project Management Division, Groupe Altus
- Sal Guatieri: Director & Senior Economist, BMO Capital Markets
- Mike Beg: Senior Vice President and Head, Real Estate Finance, Canadian Commercial Banking, BMO
- Kate Low: Regional Vice President, Real Estate Finance, Canadian Commercial Banking, BMO
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Presenter: Welcome, and thank you for joining us for today's live webcast and discussion. We invite you to be a part of the conversation. You'll see a chatbox located near the video window. Click "Chat as a Guest" and enter your name. Feel free to enter your questions, and our moderators will forward them to the panel. We'll repeat these instructions later in the show as a reminder. It is now time to begin, and I will invite your host to take the stage.
Mike Beg: Greetings everyone. I'm Mike Beg, Head of BMO's Canadian Commercial Real Estate Finance team. Thank you all, merci beaucoup for joining us today. For this event, we are excited to be joined by industry leaders who are actively involved in the Canadian housing markets and have perspective on market trends and an outlook for what's ahead. It's a guaranteed informative discussion. We have a lot to cover over the next hour, so I'll walk through the agenda quickly, and then let's get started.
We'll start with Sal Guatieri who will kick us off with economic update information. With over two decades of experience, Sal plays a key role in analyzing and forecasting the US and Canadian economies, housing markets, interest rates, and exchange rates. Following Sal, we'll be joined by Sergio Callocchia, Director of the Cost Consulting and Project Management division of Altus Group. He brings 30 years of experience as a project manager, senior analyst, and estimator in building mechanics.
We will then have a round table covering key topics and answer questions that were submitted. Moderating that discussion is BMO's Kate Low and my team leader for Quebec. She heads the Quebec region and she brings over 10 years of experience in real estate finance.
One last thing before we get started, if you are watching the event on a desktop or laptop, you will see a chat box next to the video screen. Please feel free to use it at any time during the presentation to submit questions to the panelists. Thank you for all the questions we received during the registration as well. We will address as many as possible during the roundtable discussion. With that, I'll turn it over to you, Sal.
Sal Gautieri: Thanks, Mike. Bonjour, mesdames et messieurs. As per the title of the presentation, we know what is going up, it's interest rates. We also probably know what's going to go down, and that is economic growth will slow down and the housing market will cool down in response. That really will come down to how high-interest rates actually rise to see how much the economy slows and the housing market cools down. Our overall view is that we generally believe interest rates will basically return to more normal levels, so-called neutral levels.
If that's the case, then the economy will probably just slow to a more normal rate and the housing market will slow, but most likely avoid severe correction. Economy and housing market though do face several challenges. One that we haven't had to deal with for quite some time, probably since the 1970s, and that's this issue of stagflation as shown in the next slide.
Part of that is related to or driven by the situation in Ukraine, the war in Ukraine. What we're seeing there is the type of shock that constrains both demand and supply. It constrains our economy, but at the same time, puts upward pressure on inflation. That stagflation type of environment, not as severe as we saw in the 1970s with a series of oil price shocks that kept inflation high, even though the unemployment rate was fairly high as well, but certainly to the point where it's become a big issue for policymakers and for economists trying to forecast the economy.
The impact from the war certainly on inflation is quite clear. Many key commodities, grains, base metals, energy, oil, and natural gas are produced in Russia or Ukraine. On top of that, fertilizer, those regions are big producers of fertilizer and that's causing global food costs to explode higher to record highs. Obviously, a lot of upward pressure on inflation that we're seeing right now spilling over to North America.
At the same time, that region is a big provider of a lot of key parts and materials, supplies, for example, especially in the auto industry. That's just prolonging the supply chain disruptions that we saw through the pandemic and have been extended. It's not helping matters that parts of China are locked down, also snarling the global supply chain network.
The overall impact of the war in particular is to put upward pressure on inflation and likely some downward pressure on economic growth. In fact, at the start of the war, we did take that as a measure to reduce our economic growth forecast by about half a percentage point for this year. Thankfully, Canada's economy, and the US to that matter, as well as Quebec's economy has shown tremendous, remarkable resilience, I would say, in the face of some of these shocks, in particular, those waves of restrictions that we're seeing especially through the winter of this year.
You can see from this chart of real GDP growth what happened about a year ago when we shut down parts of our economy or imposed severe restrictions, the economy did contract in the spring of last year, but look at what happened this winter. Canada's economy grew upwards of a 6% rate, close to a 7% rate annualized in the fourth quarter. We think it's growing faster than 5% in the current quarter, and that resilience largely reflects a few things.
Number one, we're all itching to get out and travel and eat indoors. There's a lot of pent of demand. Energy prices and commodity prices are generally at high levels, certainly very painful when you show up at the pump or the grocery store, but for a large net exporter and producer of commodity such as Canada, it's a boon for our economy. In fact, we're seeing some of the largest merchandise trade surpluses in this country in 14 years, which is supporting economic growth.
Fiscal policy, the federal budget earlier this year did introduce some new spending, give our economy a bit of a bump for this year. Most importantly, just that massive amount of household savings accumulated through the pandemic since we cut back on traveling and indoor dining, and many other purchases, especially for in-person services. We built up a lot of savings to the tune of almost 13% of disposable income, and that's going to support household spending for quite some time.
No surprise our economy has actually been doing quite well and we think Canada's economy could put in close to if not higher than 4% GDP growth this year. It's a bit of a slow down from last year, but that'll be the fastest amongst G7 countries. We still think we'll see above-normal growth of 3% next year, and for Quebec's economy, which grew even faster than the nation last year, it's looking at the growth of about 3.5% this year well above normal economic growth.
The economy's remarkable resilience is translated into a fairly remarkable recovery in our labor markets as well. As we can see from this slide, Canada's labor market is actually outperforming the US and most other countries. We've recovered all of the lost jobs from the pandemic. In fact, we're sitting 450,000 net new jobs higher than in early 2020, and unemployment right now, 5.2%, lowest in half a century for the country. Quebec's unemployment right now below 4%, it's the lowest in the country and we think it's probably going to fall a bit further this year as economy continues to grow at an above-normal rate.
Unfortunately, labor markets have done so remarkably well that we're now facing worker shortages and pressure on costs that's now creating an inflation problem. That's also something we haven't had to deal with for quite some time. It's been at least four decades now since we were seeing inflation rates at current levels in both Canada and the US, and it's certainly a big headache now for policymakers, and I would say the biggest threat to the economic expansion going forward.
What's pushed our Canada CPI inflation rate to 6.7%, the US rate, we just got the April number this morning. It fell a little bit to 8.3%, still the highest in four decades, but what's caused that? Well, a lot of those supply chain disruptions pushing up material costs, we're seeing a reopening bounce, airfares have gone high or hotel charges as well because those areas were hit hard during the pandemic, but unfortunately, we're also seeing a lot of persistence in inflation from rising wages in response to the labor shortages, food costs exploding higher, globally but also here in Canada, and we're not going to get much relief there for quite some time because of the severe droughts across the Midwest states and Prairie provinces, and the shortage of fertilizer now for the coming growing season, that's going to be a big headache.
Then on top of that because of the explosion of house prices in the last couple of years, rents are probably going to continue to track higher over the next year, at least. We're going to see a little more persistence in inflation. Unfortunately, even though we're probably close to the peak for inflation in Canada, it's probably going to remain quite high through this year. We still don't even see it below 3% by the end of next year. It's still going to remain above the central bank's 2% target even by the end of next year.
That, of course, has big implications for interest rates as we can see in our next slide. Bank of Canada and the Federal Reserve had told us that they have no choice but to rapidly raise policy rates back to more normal or neutral interest rates. By neutral, I made policy rates that neither help nor hurt the economic expansion, so neutral. For Canada, that's somewhere close to 2.5%, and that's probably where the Bank of Canada is eyeing right now.
We're only at 1% now. We're going to be there by the end of the summer, we think the Bank of Canada will raise policy rates by half a percentage point at each of the next two policy meetings, and then finally, we're probably going to see policy rates move up to about 2.75% by this time next year. Still within that neutral range, so it won't have a severe impact on the economy, but again. as we'll see, a lot of things are going to have to go right for the central bank to limit rate increases to that level.
The good news here is that longer-term interest rates have largely priced in or anticipated future monetary tightening. We're probably not going to see longer-term rates, and say, five-year fixed mortgage rates rise too much further, assuming inflation does roll over and start to decline, and the policy rate only ends up at neutral levels.
For the housing market, of course, it really all hinges on the outlook for interest rates right now is the fever starting to break, and by fever, I mean the frenzy we're seeing in the housing market at the turn of the year with record sales and record price growth, it is starting to break. Some of the more recent data for many cities for April suggest sales are coming down now, including in Montreal, and price growth is moderating.
We're seeing a record 29% year-over-year increase in benchmark prices across the nation, now starting to come down, and the rate is starting to fall across Quebec as well, including Montreal. That's good news, and let's face it. Most of that demand was driven by too low-interest rates, though there is a fundamentally strong backdrop for teleworkers, millennials, and as we'll see, immigration supporting the housing market.
If I had to say what's your main reason why you're still relatively optimistic about the housing market, I would say it's immigration as we can see in this next chart. Immigration is on the rebound now after getting cut in half during the pandemic, it's rebounding quite strongly. With the federal government's new targets upwards of 450,000 per year, starting in 2024, I don't think we're going to have too much trouble either hitting those targets, given all the turmoil across the globe, including the war in Ukraine.
Immigration is the biggest driver of population growth in Canada, it's why we're going to lead the G7 nations once again in population growth. Population growth is the foundation of household formations. That's why we're going to have to build a lot more homes to meet that or serve the new immigrants coming to the country, but it's the main reason we're still relatively optimistic about the housing market.
The biggest challenge for the housing market apart from finding, say, enough construction workers to build all those new homes is affordability. As you can see from this table here, which shows the percentage of meeting family income required to cover mortgage payments on a typical property, well, Toronto, Vancouver, for the latest quarter, off the charts, upwards of 2/3 of your income. Most households are priced out of the market, but even Montreal mortgage service costs have gone up a lot now, 29% of family income. That's about doubled since the start of this century, still within the affordability range. It's not pricing out a lot of people, but certainly getting up there.
Then you can see there are still a lot of regions in Canada, Quebec City, for example, along with many cities across the Prairies, which are relatively cheap right now, very affordable with mortgage service costs in Quebec, for example, only 16% of family income required to cover mortgage payments. very affordable. Those are the regions that still have some room to run price-wise going forward, even in a rising interest rate environment, even though prices are likely to fall off a little bit in places like Montreal and across the rest of the country.
Next slide, please. Governments trying their best to bridge that affordability gap. Unfortunately, it's a little too late. Some of the demand measures put in place in the federal government will be helpful. Let's face it, foreign investors are not the biggest driver of the housing market. Help for first-time buyers to save up for property, yes, that will help, but I think those demand measures are a bit of a wash.
On the supply side, yes, a lot of new funds to promote construction. There is an ultimate goal over the next decade to double the rate of homebuilding. That's going to be a tough task though, given construction shortages and municipalities kind of pushing back on building multiple-story properties in highly dense locations. Big challenges there. I wouldn't look for much improvement on the affordability front from the supply side for the next several years or so. Most improvement in affordability will come through an outright decline in prices because of higher interest rates.
Just to recap with our last slide, economy is going to slow, housing market is going to cool down. We probably will see nationally house prices pulling back 10-15%. That might sound like a big correction, but it's not. That will only bring prices back to where they were in the fall of last year. There is a risk of a bigger correction, but only if interest rates go up materially more than we anticipate. If they trigger a recession, for example, then we'll see more of a correction.
Finally, I'll just mention whether you want to go fixed or variable with a mortgage rate, right now, given that fixed rates are so much above variable rates, probably doesn't matter savings-wise over the next five years, the policy rates just go back to more neutral levels, it won't matter much. Personal preference to stick with variable because we believe that if interest rates go much above neutral levels over the next couple of years that probably will spur more of a downturn in the economy and inflation, we might need to see the Bank of Canada reverse gears on interest rates and cut rates. Personal preference to stick with variable, but really it comes down to your personal financial situation and choice. With that, I'll turn the floor over to Mike Beg.
Mike: Thank you very much, Sal, for your insights and update. I'd now like to hand it over to Sergio who will be giving an update on Quebec regional market trends.
Sergio Callocchia: Good morning, everyone. Thank you to Mike Beg, Kate Low, and BMO for allowing me and Altus Group to be part of this presentation today. My portion this morning will touch on the present situation and trends in the construction market for the province of Quebec and Montreal Metropolitan area.
I'm sure you're all aware and read the news of the volatile and unpredictable construction industry. How do we start to explain on how we got to this point? What I can tell you is the present challenges in the market are not all recent. It was a build-up of many years and there are a variety of reasons for rising construction costs. We need to go back to about 2017, the start of a real estate construction boom, not seen in over 40 years, not seen since the era of Expo 67 and the Montreal Summer Olympics in 1976. I got a couple of nice photos there for those who remember.
To begin, I'll start with the situation in a pre-COVID market. Since 2017 and the end of 2019, the construction industry was very active with a high level of demand in the real estate market. Multiple projects were launched for all asset types, especially residential for single housing to multi-res, condominiums, and rental buildings. Densification was the new trend. We saw a steady climb in condo and apartment starts, and a gradual shift as the years continued from condominium purchases to rental apartments, this mainly due to affordability. Either way, the demand was on a rise.
This shift from condo to rental essentially started in 2016 and 2017, and as you can see from the slide on the top right. This demand was enhanced by population growth. Sal touched on that, mainly driven by immigration, and we saw large increases in all major markets across Canada. All regions were seeing noticeable increases in population growth, especially Ontario in blue, as you see on the graph, but also Quebec, as you see in green.
Added to immigration, major infrastructure projects were launched such as the Turcot expressway, Champlain bridge, and the light rail train, our famous REM project. The lack of housing also contributed to this issue and this has been a problem for many years across Canada. This new demand was the beginning of increasing costs in the market.
Labor. The lack of skilled labor in the construction industry already existed, but this is generally controlled by unionized labor agreements. Typically, it's a 3% per year increase and a recent agreement was ratified in spring 2021 for three more years, a somewhat stable and predictable increase. Thankfully, we avoided any strike actions. Of course, this is what added more problems.
Land values. Well, it all starts with land values and transaction. In recent years, we have seen unprecedented land sales and major cost increases. New price levels of land and property acquisitions, never seen before, and new benchmark highs one after another. Project development begins with land and property costs, the feasibility of a project, and verifying its highest and best use to develop that land.
Overall construction costs, pre-pandemic, in summary, all costs are rising. Materials, evidence of increase due to new demand that started and was seen in many types of materials, such as concrete supply, wood, and finished goods, finished products, metals, to name a few. For all major sub-trades, evidence of increases were seen due to demand specifically in formwork, rebar, interior systems, exterior envelopes like windows, doors, curtain wall, and all mechanical electrical trades.
When it comes to total project costs, we witnessed all other project costs on the rise. Development charges, such as park fees, existed already. However, new ones were added such as our famous 20-20-20 social affordable and family housing charges by the City of Montreal, the REM, our light rail train, which increased overall project cost also. Partially to pay the CDPQ development fee, this development charge for the REM is $10 per square foot of total buildable area for all new project developments within a surrounding REM station.
In South Coast, design professionals and farmers were all busy, and increased fees had started. Financing rates were low and lots of availability, so aggressive and no issues there. Essentially, the province and especially the Montreal and surrounding area were witnessing a market construction boom not seen in over 40 years. Downtown, midtown, East-West, North [unintelligible 00:24:34], Mirabel, South Shore, [unintelligible 00:24:36], and even in Quebec City and its regions, we're seeing a boom.
Then came the unpredicted COVID. Early 2020, the start of a world pandemic that added uncertainty to the world and would complicate the real estate and construction industry. In March 2020, construction was shut down for six consecutive weeks and impacted existing construction sites, new project starts, and projects planned for development. There was plenty of vagueness on procedures and new measures put in place on construction sites. These new measures and the government shutdown had an impact in construction delays, basically the completion dates. That was essentially added cost to the projects.
To this, several international trade agreements were no longer in place or respected, this brought new challenges to the planning and development of construction projects. Major supply chain issues were encountered due to local and international manufacturing plants being shut down and reduced workforces. Substantial increases in container shipping and trucking added to the problem. The demand had a short decline in early 2020, as we were all waiting to see the outcome of COVID.
However, there were too many projects that had been planned started, or in the pipeline. Existing and new construction projects continued as you can see in the slide of the building permits issued over the course of the pandemic. The total gap of starts and completion is getting wider, continued delays and completions of projects due to lack of labor and materials.
This is not a good thing as it creates a backlog of uncompleted projects and evidence that the supply is not keeping up with the demand, fairly evident on the last column of 2021. Added to this, the continued issue of lack of housing, especially affordable housing, not in balance, a large demand, and a smaller supply that is moving further from a balanced market.
The bad news, there's no good news to report on inflation and construction cost escalation. These are all driven by supply and demand, lack of labor, supply chain issues, and rising commodity prices. We are seeing major price increases in raw materials, and especially all metal-related products, such as extruded aluminum, structural steel, reinforcing steel, sheet metal, and piping to name a few. Of course, the rising petroleum prices have not helped and have an impact on overall cost.
Locally, if you recall last summer, wood prices soared to all-time highs, four-time the benchmark price due to wood-frame construction of homes, renovations, exports for high demand in the Southern United States. Work and stay-at-home brought an increase in warehouse and distribution demand due to online internet shopping, an unprecedented demand in industrial warehouse and distribution type buildings have been built and are still under construction.
Essentially, they cannot build them fast enough. With this high demand, corporations with plenty of money are able to pay premiums for their projects to start and finish on time. This adds to the problem of lack of materials, labor shortages on all other construction projects. There is no doubt that there are higher risks in the construction industry. This has a direct impact on construction project costs, their completion, and the feasibility of a project.
The outlook. In this ever-changing market, it becomes very difficult to predict the outlook for the future. One thing we do know is, with all these challenges, costs are still rising. We have experienced in 2021 some of the highest construction cost increases from 8% to 18% in different asset classes with an average of 12.5% overall for 2021. Escalation and inflation are high and expected to continue. However, how long can the market accept these increases? When do project performers no longer work and projects are not feasible anymore, and eventually, you have no green light to start?
Speaking with my colleagues across Canada, the issues are very similar. Projects are complex and large. Government approval is slow. Fees and taxes are high. Supply chain issues are real. Labor shortages have not been resolved. Then you may ask how do projects continue? Successful projects are all about relationships, the right people, right partners, people who could help and not hinder the process. This ends my presentation. I would like to thank BMO and their team today, and I believe I pass it on to Kate.
Kate Low: Thank you, Sergio. Greatly appreciated. Now, we're going to move into a roundtable to answer all of your questions. Just as a reminder, if you haven't had the chance yet to submit a question and would like to do so, please submit using the chat question-and-answer box found on the screen below. Now, let's get started. Our first question is for you, Sal. Would you say is it mostly a lack of supply or too much demand that has led to the poor and affordability in so many regions?
Sal: Well, it's always both when you're talking about prices and affordability. It always comes down to supply and demand. They both affect prices, obviously. No doubt, if we could have built more houses than we did, we would have had less of an issue with affordability, price growth would have been a bit calmer, but let's face it, we really have not had a whole lot of difficulty at least meeting population growth for the last while.
If you look at some of the stats, Canada data, even back to 2006, for the most part, housing completions have kept pace with private dwellings right up until 2021, at least. We have an issue with not enough supply, but it really comes down to an issue of overheated demand. That was largely the consequence of interest rates staying too low for too long. We know that we saw house prices surging in other countries not just Canada, the US, Australia, parts of Europe, house prices surged as well. Why? Because demand was strong in response to very loose monetary policies.
We also saw house prices surging across regions, rural regions, smaller cities that normally don't face a supply issue. Most importantly, we saw investors driving house price gain, especially in the last year, in response to those very low borrowing costs and fear of missing out because prices kept going up. All signs that the biggest problem we had here was more on the demand side and the supply side. The good news is we'll see some of that pressure coming off of prices and affordability because demand will be cooling pretty quickly in response to much higher interest rates over the next year.
Kate: Thank you, Sal. Sergio, this one's for you. With a challenging construction market, what are you seeing today? What are builders and developers doing to manage some of the issues and the risks?
Sergio: That's a great question, Kate. Not necessarily an easy one to answer because it all depends on the project, the players, and the circumstances around the project. The market has become more complex construction, execution and delivery is very difficult to meet with the challenges in the market. Projects, in general, have become larger with mixed-use transit-oriented development. It's not like a single building anymore. They're basically complexes.
The projects are much larger and essentially more costly than they were in the past. However, the general response would be what I've seen is an increase in partnerships, joint ventures, and more development agreements between builders and developers of all stripes. This approach has helped them stay competitive, join forces, use their better ideas and leverage their networks, and market relationships locally. I think it's a lot of partnerships and joint ventures has helped. We've actually seen a lot of that even in banking. We've seen a lot more syndications. That helps basically spread some of the risks, I guess.
Kate: Interesting. Thank you. Another question from the audience. Both you, Sergio, and Sal, touched on supply chain issues. What are builders and developers doing to work around this bottleneck and its associated increase in cost? Sergio?
Sergio: Another great question. It's a new trend that we're seeing, that we've seen in the past, more based on site delivery of materials. Now, with the volatile pricing, what we're seeing a lot of builders and contractors doing are they're basically pre-ordering materials to guarantee their present pricing. They're placing deposits on present pricing of materials to guarantee when shipped and received, it's a stable price because they do not know whether the price continues to decrease in a month or two.
This approach is a great approach. It's a partial solution to the present situation. We're seeing it more and more. However, it does require extra diligence because it does come with some risk for offsite materials and payment of deposits in advance. There is a recommended procedure to accept deposits and offsite materials.
Kate: Thank you, Sergio. Sal, we have a question for you. Do you believe that remote working trends are permanently impacting the housing market?
Sal: I think they will to a certain degree, maybe not as much as in the early days of the pandemic, but I think we are seeing a permanent shift towards the so-called hybrid work model. That does have implications for the housing market. Most surveys do suggest that the small majority of office workers do prefer to work a little more time from home than in the office. That does mean that we will see a lot of companies for competitiveness reasons, especially in these tight markets, labor markets move towards a hybrid model. What that does mean is that we'll see continued moving out from the core regions probably not to the extent we saw in the early days of the pandemic, but I think a lot of that shift will hold going forward.
It doesn't mean we may not see price growth, moderate. In fact, we will due to higher interest rates in some of the smaller regions and smaller cities that have benefited from teleworkers. We will see, I think, prices holding up reasonably well in those outer regions. Now, still, there's only a certain amount of drive to qualify that can exist. I think regions that are a couple of hours or so or less away from the core center where many offices are located will still do relatively well. As far as cities and regions located four hours away, if you have to be in the office a couple of days a week, that's a bit of a challenge. You're not going to save much on commuting costs going that far out.
I think there will be some of a permanent shift, but more geared towards regions that are within one to two hours away from urban core regions. Now, remote work was supposed to level the affordability field as some of the prices that were very cheap in outer regions rose, and some of the prices in Toronto, Vancouver, Montreal, came down. We didn't see that during the pandemic again because of the excess demand pressures from too low-interest rates. I think overall, remote work is a benefit to overall affordability because families can move out, buy a bigger home in generally less expensive regions.
Kate: Wonderful. Thank you. Sergio, here's another tough question for you. You touched on the labor shortage, which is a big problem for lots of builders and developers. How can we, how can schools, how can cities fix this significant labor shortage problem?
Sergio: Great question. The governments already have programs and they have training facilities, and I believe they've been around for about 8 or 10 years. There is money being invested on the provincial level for local tradesmen to go back into the market and become specific tradesmen. I think the issue is there's not a lot of interest. It's not an easy one. Even though they've had this program, the issue becomes-- there's more retirements that are starting than new people joining the industry in these specific trades. That gap is not being covered with new young people starting in all these specific trades. The answer is it's not good. It's going to continue. I would say that, especially Quebec unions like it that way, they're high in demand. It gives them better negotiation power.
Kate: Interesting.
Sal: I could weigh in as well, Kate. I think one of the best things the government can do and has done is just raised its immigration targets because that will help to fill a lot of the labor shortages across Canada, especially with a focus moving towards attracting skilled workers. The high-tech industry, for example, we're seeing a lot of American companies hire Canadian workers to take advantage of our highly skilled tech, labor force, whether your company is based in Canada or not through remote work, it still works.
For the construction industry as well, we need people to actually live in Canada, and work here to build homes, but the best solution, I think, is just what we're doing. That's attracting a lot more international migrants.
Kate: Great answers, guys. Thank you very much. Sal, we have another question for you. If supply chain issues were one of the main factors for inflation, will increasing interest rates really help in correction?
Sal: We believe so, Kate. There's no dispute, much like in the housing market, that the supply challenges have given that extra push to inflation, either in the housing market or overall inflation. There's no doubt that first the pandemic and then the war in Ukraine has just aggravated the horrible situation across global supply chain networks, not just in the auto industry, it's almost every industry now, including construction.
That's been a big problem. Policymakers don't really have much control over that situation but they do control or can control the excess demand pressures that were pushing overall inflation and house price appreciation in the past year. That's what they're actively trying to do now by getting interest rates back to more neutral levels as quick as possible. Then possibly raising rates a bit further, just to cool down demand to so-called restore price stability. That will have the most immediate impact in reducing inflation pressures across Canada, and it's front and center of what the Bank of Canada is trying to achieve now.
Kate: Wonderful. Thank you. Sergio, a question for you. Do you think that the cost increase will be permanent? Or will it normalize?
Sergio: Yes. That's the million-dollar question, Kate, everyone's asking. Basically, what are the trends for 2023 and 2024 I gather? It's a difficult one to predict. There are a lot of issues out there. Everyone's finding solutions to them on a daily basis. I don't know if we can put back the slide that I had. I think it's slide number 23 that shows the trend of the last five-six years. If you can put that back on the screen, it'll give you an idea.
I mean, eventually, yes, things have to come back to normal. Normal inflation escalation and construction is 2.5%, 3%. We're seeing an average in 2021 of 12.5%, never seen in my lifetime. If you go back to 2016, 2017, 2018, and 2019, we saw a gradual increase from 2% to 3%, 5%, and back to 4%, then skyrocket up to 12% in 2021. Eventually, yes, it does have to come back down and normalize at 3%, but it will not take a month. It will definitely take six months. My guess would be more like 12 to 18 months before we get closer to normal construction inflation of 2.5% to 3%.
Kate: Wonderful. Thank you again, Sergio. Well, everyone, thank you again for joining us. We hope that you've enjoyed today's session. I want to take a quick minute to thank you for taking the time out of your very busy day to spend your time with us here. On behalf of BMO, we want you to know that we're thinking of you, your families, and your organizations. We're here to help.
We've been through very uncertain times over our more than 200-year history. We have a strong capital position and we're well prepared to serve our clients. Just as a quick reminder, today's call was recorded and is available for playback. You'll receive details on how to access that in an email later this week. This concludes our call today. We're giving you back a few minutes in your day. Thank you again and take care. Bye.
Mike Beg
Head, Real Estate Finance
Mike Beg as Head, Real Estate Finance, Canada is responsible for management of BMO’s Commercial Real Estate Finance group and its client relationships across …(..)
View Full Profile >BMO’s Commercial Real Estate team offers an insightful virtual discussion on the Quebec housing market, regional market trends and economic outlook. Featured panel speakers include:
- Sergio Callocchia: TP, ECA, ECCQ: Director, Cost Consulting and Project Management Division, Groupe Altus
- Sal Guatieri: Director & Senior Economist, BMO Capital Markets
- Mike Beg: Senior Vice President and Head, Real Estate Finance, Canadian Commercial Banking, BMO
- Kate Low: Regional Vice President, Real Estate Finance, Canadian Commercial Banking, BMO
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