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This transcript has been generated using machine learning technology. While this technology was trained with CIBC terminology, it may contain errors.
Introduction: Welcome to Eyes on the Economy by CIBC Capital Markets, a podcast series dedicated to addressing current issues in a concise format, helping to make sense of the evolving economic complexities, so that you can take action.
Avery Shenfeld: Hello everyone. Welcome to our latest Eyes on the Economy podcast. I&#8217;m Avery Shenfeld, Chief Economist at CIBC, and in a moment I&#8217;ll be joined by our Deputy Chief Economist, Benjamin Tal, to talk about housing. But before that, I want to review a couple of items that we&#8217;ve written about recently, items that appear on our website, that address some of the issues facing the Bank of Canada outlook for the year ahead. As you may know, the bond market, actually the forward markets are starting to price in some odds of a Bank of Canada rate hike as early as the middle of next year. On its part, the Bank of Canada seems clearly on hold and is not giving any direct signals as to if another move were to come, which way that would go. But when we dig into both their statement and some of the issues that are being raised by people who do think they will hike in 2026, there are reasons to suspect that, based on our analysis, that either the inflation fears related to that or the potential pressure on capacity in the economy are overstated risks, and therefore a rate hike is likely to be a long way off. When the Bank of Canada last did a full monetary policy report, they did show a chart that suggested that they had some concern that cost push inflation could be a source of upward pressure that would take the CPI above its target. In its most recent statement, however, it didn&#8217;t seem overly concerned with the inflation outlook. And that&#8217;s consistent with what we found when we dug into some of the issues relating to cost push inflation. Those concerns really rose as a result of the rejigging of trade relations that is underway as a result of U.S. tariffs. Concerns that either higher manufacturing costs for things we buy in the US due to tariffs that Americans are imposing on their manufacturing inputs, or the need for other companies to perhaps raise prices to try to make up for sales they&#8217;ve lost in the US could push up prices here in Canada. The data don&#8217;t show any material uplift in consumer goods imports pricing, whether it&#8217;s autos or non-autos, they seem to be fairly contained at this point.
It is true that Canada&#8217;s industrial product price index has heated up a bit, but most of that is not in the consumer goods basket. Really, a lot of it relates to gold prices actually moving up. Some of it does relate to meat prices accelerating, but we can see looking at cattle futures and what&#8217;s happening in the underlying market that feeds into beef prices that they may be cresting as opposed to coming down, but that the rate of inflation there is likely to decelerate.
So it does not appear to us based on the paper we wrote that cost push inflation is likely to be a serious issue either now or looking ahead into 2026. Remember that outside of autos, Canada imports the majority of its consumer goods from outside the US, either Europe or Asia. Manufacturers in those countries are facing tough sledding in retaining market share in the US due to tariffs, leaving them with excess capacity and if anything likely to put some downward pressure on their export prices. And that&#8217;s what we&#8217;re in fact seeing in producer price indexes in Canada&#8217;s trading partners outside the US. If you weigh those to Canadian imports, they generally look quite tame. The other issue that may have some people thinking hawkishly on the Bank of Canada for next year is that we did see a big upward revision to Canada&#8217;s GDP growth rate over the prior three years when the most recent GDP numbers were released. And it is true that Canada fared better in that three-year period than we had earlier suspected. But that said, that didn&#8217;t come from using inputs more aggressively. That didn&#8217;t come with a downward revision to the historic unemployment rates. That came from just better productivity.
And remember that in the first set of data, productivity looked abysmal, looked like it was declining. Now, basically, it&#8217;s flat over the last few years. If anything, that helps us on the cost inflation side, better productivity. But it also means that the economy&#8217;s productive capacity was also growing faster than we thought for the given amount of labor and other inputs we have, which should raise potential GDP or the non-inflationary speed limit of the economy, just a much essentially right in line with the upward revision in actual GDP, leaving us with roughly the same amount of slack. Now it is true that in the last few months we have seen some improvement in the unemployment rate, which will narrow our estimate of the output gap a bit. But we do like the Bank of Canada think that Q4 growth will be a bit slower again. And so we still see ample slack, lots of reasons for the Bank of Canada to be very patient in 2026.
Given that they&#8217;ve barely put interest rates into stimulative territory, there should be no rush next year to start hiking. And with that, I&#8217;d like to now bring in our Deputy Chief Economist, Benjamin Tal, who&#8217;s done some interesting recent work on the outlook for housing in Canada, a sector that&#8217;s been quite slow in 2025, looking ahead to the coming year and whether we&#8217;re likely to see any improvement on that front.
So Ben, I&#8217;d like you to just summarize what you found when you looked ahead at the factors that might drive housing activity in the coming year.
Benjamin Tal: Yes, thank you. First of all, let me say something about inflation. You have a problem with the cost-posed inflation. I have a problem with the rent inflation. I don&#8217;t buy it. The States of the CPI telling us that rent inflation in Canada is 5%. I simply don&#8217;t buy it. If you look at what&#8217;s happening in the market, asking rate is actually negative on average, and the turnover rate is at a record low.
So I cannot see how rent in Canada is rising by 5%. Given the fact that rent is about 0.7 % weight, or basically 7 % weight in the basket, it&#8217;s not insignificant. So I think that we are inflating the inflation number, but that&#8217;s something for a different time. Let&#8217;s talk about housing. And as you know, Every, there is no such thing as a housing market in Canada. It depends where you live. Alberta is doing fine. Atlanta in Canada is doing fine.
Ontario and BC are actually in a housing market recession. However, if you look at what&#8217;s happening recently, we&#8217;re starting to see this regional gap narrowing, permits everywhere starting to slow down dramatically, and new home sales are actually falling, and that&#8217;s a leading indicator for resales. This is happening for many reasons. Clearly, the economic uncertainty is slow down in population, especially in places like Alberta. And I believe that interest rates are now secondary when it comes to impacting the psyche of home buyers at this point. I think that the best way to describe the housing market in general is that it&#8217;s too expensive to buy, not expensive enough to build. The market is broken, the market is frozen, and we have to provide incentives to developers to actually reduce the cost of delivery, which is not happening. Now, what&#8217;s happening, especially in the condo space, is that prices are going down in Ontario, in BC, Toronto, Vancouver, and also elsewhere, we see the price of condos going down. In Ontario, it&#8217;s down by about 22 % since the peak. And I think that&#8217;s not over yet. We are talking about another 10, 15 % decline before the market clears. We are building basically zip now. We are building nothing. And this market will clear in 2028, maybe 2029. By then, prices will rise in a very significant way. Another force that might accelerate this process is something that we published actually today, the issue of doubling up. Doubling up is the situation in which more than one family lives in one household. So basically sharing accommodation. The doubling up rate, in my opinion, if you look at the numbers and if you account for all kinds of missing issues there, in places like Toronto and Vancouver, can reach easily 30%. Now this means that we are underestimating how difficult the situation is because of affordability, because doubling up is happening because of affordability issues. Now if prices are going down, this means that we&#8217;re going to see un-doubling or de-doubling, which means that that will introduce another source of demand. So the original source of demand is immigration and young people starting their own household. Add to it decoupling or de-doubling and that&#8217;s something that can have a significant impact on the speed at which the market is adjusting.
Avery Shenfeld: Now in your outlook, but it just says to go to the outlook for construction next year or starts and so on. You did talk up a little bit about maybe things starting to turn in the second half of next year. Where would we be looking for that?
Benjamin Tal: Exactly. think that we look at the economy as a whole starting to improve in the second half of the year. And I think the housing market will be there as well. We have three forces happening here. Interest rates will remain low. The government is pushing from the fiscal policy and the fog regarding Trump will start disappearing in the second half of the year. So when it comes to the housing market, I see 2026 as a transition year between a bad situation and a much better situation. And that includes the housing market, especially starts. So this first half of the year will be actually relatively weak.
Second half will be better. 2027 will be a good year when it comes to construction. That&#8217;s the way I see it.
Avery Shenfeld: Okay, and for our listeners, I remind you that on CIBC&#8217;s economic website, you can find both of the research pieces that Benjamin was talking about, his current write-up that just came out this week on doubling up and why undoubling, in effect, down the road could be a source of additional demand, and also his broader look ahead at the year as a whole for housing coming up in 2026. And with that, that concludes our current edition of
Eyes on the economy until next time. We&#8217;ll be keeping our eyes on the economy and calling it as we see it. Thanks for joining us
Outro: Please join us next time on the Eyes on the Economy where we will share our latest perspectives and outlook for the Canadian and US economy.
Disclaimer: The information and data contained herein has been obtained or derived from sources believed to be reliable, without independent verification by CIBC Capital Markets and, to the extent that such information and data is based on sources outside CIBC Capital Markets, we do not represent or warrant that any such information or data is accurate, adequate or complete. Notwithstanding anything to the contrary herein, CIBC World Markets Inc. (and/or any affiliate thereof) shall not assume any responsibility or liability of any nature in connection with any of the contents of this communication. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice. CIBC Capital Markets is a trademark brand name under which different legal entities provide different services under this umbrella brand. Products and/or services offered through CIBC Capital Markets include products and/or services offered by the Canadian Imperial Bank of Commerce and various of its subsidiaries. For more information about these legal entities, and about the products and services offered by CIBC Capital Markets, please visit www.cibccm.com. Speakers on this podcasts are not Research Analysts and this communication is not the product of any CIBC World Markets Inc. Research Department nor should it be construed as a Research Report. Speakers on this podcast do not have any actual, implied or apparent authority to act on behalf of any issuer mentioned. The commentary and opinions expressed herein are solely those of the individual(s), except where the speaker expressly states them to be the opinions of CIBC World Markets Inc. Speakers may provide short-term trading views or ideas on issuers, securities, commodities, currencies or other financial instruments but investors should not expect continuing analysis, views or discussion relating to these instruments discussed herein. Any information provided herein is not intended to represent an adequate basis for investors to make an informed investment decision and is subject to change without notice. CIBC World Markets Inc. or its affiliates may engage in trading strategies or hold positions in the issuers, securities, commodities, currencies or other financial instruments discussed in this communication and may abandon such trading strategies or unwind such positions at any time without notice.

Canada’s 2026 Outlook: Inflation, Bank of Canada policy, and housing

CIBC Economics

Avery Shenfeld

Managing Director and Chief Economist

CIBC Capital Markets

Benjamin Tal

Deputy Chief Economist

CIBC

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