61: Breaking Down the Bank of Canada Rate Hold with with BCREA Chief Economist Brendon Ogmundson

0:00 back to the Kelowna Real Estate Podcast. I'm your mortgage broker host, Taylor And I am your real estate agent host, The Matt The Matt Glenn. I'm going to look for another Matt Glenn There isn't. There's only one. How's it How are you? I'm doing great, man. Went out for family dinner last night at a Mexican place downtown, Chilango, Mexican. It was like insanely good. They have this cheese dip appetizer. Highly recommend it. Oh my God. Yeah. Queso. Queso, you mean? Yeah. Yeah. It was a queso dip and brought me back to the Yeah. days. Oh, I love that, dude. That is awesome. By any chance, was the building falling apart like every other building downtown? No, it was an amazing building, but we were talking about this. Have you heard about this? The UBCO campus, like several buildings have now been evacuated around that hole.

0:43 So I heard about it on our last podcast when Ben Stewart briefly touched on it saying he was talking to the housing minister and I didn't really think a whole lot of it until you were disclosing how bad it was. So yeah, shed the light. It was crazy. So like in the fall, the CoLab, who like a couple agents in our office had offices in there where they were just told to leave because they were no longer safe to be in the building. That was last fall. And then a few months ago, I think the Legion was evacuated, which is pretty amazing because I'm pretty sure it's only a one story building. And then just now the 68 unit supportive housing place is evacuated. It's like this is kind of crazy to have this many other buildings just have to be abandoned so that this building can get built i near there a few weeks ago and i yeah the vantage point like in the interior health building yeah it was like three four stories up i was looking i'm like this is a massive hole like how are they supporting the adjacent land but obviously there is an there before they started digging i was hearing that it's like downtown colonna like we're close to the lake right i used to live downtown colonna and one time a few years ago probably like in 2013 i was digging a hole to plant a tree in my yard and i dug down probably like four feet and there was water in the hole right so like i basically dug a well in my backyard i mean first of all very impressive you dug that deep good for you but secondly yeah so there are challenges with digging down in a hole in downtown but like obviously when you're digging a hole like that it can get a little crazy but it's just i don't know if it's just like the age of the buildings or the way they're built compared to that place that's yeah making them crumble but my god i sent some repercussions in the near future i don't know what i'm not the right guy to ask but something like you can't just evacuate all these buildings and

2:15 just move on yeah you heard it here first digging a hole is hard to do downtown yeah somebody's gonna be accountable yeah the building is gonna be awesome when it's done but like it's not gonna make future projects easy that's for sure there's gonna be yeah wild well talking about digging a hole bank of canada. Last week, we're recording this on the announcement day, but they have maintained their overnight policy rate. So no change. We bring in fan favorite Brennan Augmentson, two-time returning guest, BCREA chief economist. We were talking a little bit off air. He's so intelligent, but he said, you know, one of the hardest parts of his job is basically to communicate this complex data at a level that most people can understand and he's doing a terrible job yeah i don't understand anything the says okay last night i literally woke up and i was like you think that an economist would not be selective for someone that can talk about facts like this so well but like it's amazing i think that the vcra is the jackpot hiring this guy he was awesome to have on especially on rate day talking about the rate it was he had some smart he's one of the best guests to have on because you don't really need to do any prep work for him like matt and i are just like a machine gun firing as many questions as we can adam you know 45 minute period yeah there's nothing that stops them.

3:27 It's actually pretty fun. He's a great guest. Yeah. So we do talk about Bank of Canada projections. We talk about some current policy changes that the government provincially and federally have come out with. Talk about where fixed rates are, where they could potentially go in the next few years. And he's just such a great resource. Give him a follow on LinkedIn. He posts a few times a month and his reports are just honestly fascinating yeah easy to digest but like just raw data here's what it is so yeah love having him on yeah give him a follow he's that he even comes on our show so we're getting somewhere yeah yeah absolutely the best podcast in town soon to be voted number one thank you listeners is sponsored by the best brokerage in town also soon to be voted number one thank you listeners is sponsored by the best brokerage in town also soon to be voted number one century 21 insurance realty it is the real deal brokerage i've been out since the beginning of my career wouldn't be anywhere else the best support staff the best marketing department the best managing brokers it is the real deal i go there taylor's wife emily works there yeah it's amazing you should it out we are having max on next month's coming on the show his show will be out in a couple weeks and you guys can kind of yeah listen to his story a little bit more he's been on the show once before but he's going to dive into some more interesting stuff for us so stay tuned for more yeah so if i was right if you could please vote for the podcast and vote for century 21 best Best of Kelowna, Kelowna Now.

4:44 Super happy that Kelowna Now even does that, but yeah, it'd be awesome to have that support. Yeah. And now, Joey, the show. It's a good welcome back to the show, Brennan Augmanson. Thanks for joining us. Great to be here, thanks. So today's the day of the rate announcement, so I imagine you're probably one of the busiest guys in BC. Yeah, I mean, not so much media-wise because they banked and didn't do anything, but I have to get up really early because the Bank of Canada now is doing their announcement at 6.45 a.m. Pacific time. They've got to prepare an email to send out to subscribers before that, and then do some other kind of posts and work and see if there's any major implications from the Bank of Canada's policy statement or anything. So I've got to be a little more on the ball a lot earlier than I'm used to. I'm not a simple person.

5:24 So a few more cups of coffee earlier and I was ready to go. That's awesome. I mean, we'll just let the listener know that we are recording this April 10th. So yeah, it is Bank of Canada rate announcement day and we'll try and get this out a week after. Was this expected by you? Like, where are we kind of sitting at expectations for today? I think especially, you know, if you look at the trend in inflation and the measures the Bank of Canada watches really closely, like, especially like they even called it out today, three-month annualized core inflation, which is like for all the real monetary policy heads out there, that's like, oh, they're dropping all the trend inflation numbers that we're all watching in their statement. Those measures have been trending at target or below. If you strip out shelter costs, it's actually been negative over the past three months.

6:04 Price levels have been negative. And even on a year basis, ex-shelter, inflation's running at like 1.4%. Combine that with the fact that unemployment rate jumped to 6.1% in March, which is the highest it's been in three years. That has been unexpected. Not necessarily because we're losing a lot of jobs, but more so the labor market can't create enough jobs to keep up with population growth. Those two things tell me that it's probably time to cut rates, but the Bank of Canada is fairly cautious, so I didn't expect them to do that today, but there's certainly a lot of evidence they should be looking at cutting rates in June. We'll see what happens. We get two more CPI releases before the next meeting. So hopefully those also are showing inflation trending downward and that'll convince the bank to cut at their So when you say shelter costs, how much of that is interest rate, like mortgage rate? A good portion.

6:48 So shelter is both rent and ownership costs. We calculate CPI. Overall, shelter is about 30% of the weight in how we calculate CPI. So it's a pretty major driver. I think about two thirds of that 30%, it's about 18, 20% of it is ownership costs. Part of that is mortgage interest rate costs. I think it's like six or 7%, but I have to look. And then the rest of it is just like maintenance costs for owning a home and property tax and home prices are reflected in there too. And then on the other side, it's that last 10% or whatever is on the rental side is rents and costs. So it's certainly big and it's certainly been a major driver of inflation because it's been up 30% year over year. So Bank of Canada knows that their own actions are driving mortgage interest rate costs higher, right? And one of the reasons why a core inflation is going to be a little bit sticky because of shelter costs, you can make a really good argument that the Bank of Canada should look past those costs because there's nothing monetary policy, one nothing that high interest rates can do to fix shelter inflation right now.

7:46 And in fact, as you kind of hint at, they're actually driving shelter costs higher with higher rates, either just mechanically from having mortgage interest rate costs higher or by impeding supply. So we're not able to get as much built because borrowing costs are too high. So long term, they're actually impeding, kind of bringing inflation back down. So to apply. So long term, they're actually impeding, kind of bringing inflation back down. And then also most of the demand side factors pushing rents higher are about federal immigration policy, not about really like overheated demand or something. It's not like the market right now, like the ownership market is pretty weak. So it's not like we're seeing like overheated demand in the ownership market. And we're not seeing like, oh, we have so much job growth for young people that it's pushing more and more people to form households, move out of their parents' houses and rent apartments or something, right?

8:30 We have a huge amount of non-permanent residents, a lot of temporary foreign workers and students, 850,000 in Canada in 2023. And that's putting a lot of pressure on rents. There's nothing that high interest rates can do about that particular problem. We So, you know, we look at inflation and most of it's coming from shelter costs that are outside kind of the purview of monetary policy. Probably, you know, a good time just look past that and set rates based on some measures that strip those shelter costs So we have the federal government. I think they've come back a bit on the immigration and the temporary foreign worker thing. But like, so that adding to it, but then you have the BC government and the federal government adding all these rules, like how much of an impact are these things going to have all the things that they've done seemingly every week since we've had this podcast?

9:12 The provincial government has been busy. Some of it good. So over the past year, they've announced a lot of the types of supply side policies that economists have been saying we should be doing for close to 20 years. So things like density around transit and small scale multi-unit housing on single family lots, that kind of thing. Hopefully speaking of permitting, that's all part of their homes for people plan. And then they throw in some stuff that's not so great that I think is just sort of to feed feed their base perhaps, or maybe to be charitable, maybe they just really believe that things like speculation is a real problem. So they also in their budget had a flipping tax that's 20% on the profits of selling a home that you purchased within two years applies to both primary residence with some credits and exemptions, as well as secondary housing, which again is already taxed at the federal level, but why not throw on another tax? I see one post for the anti-flipping tax, if it will actually do anything.

9:59 So you said it would lower sales by 1.7% in BC estimated. I mean, first of all, that's amazingly specific how you first of Doesn't have all the reason for no reason. it's not going to do the intent of what the government is trying to do. Obviously, So do you think like they have good intentions behind it and they think this will actually work? Or is it just more of a, hey, we got to throw everything at this and it helps them in media as well? I think they believe, maybe not as strongly as they used that to, this sort of thing is a real problem. I don't need to believe that. Otherwise, it'd get too cynical. I mean, they don't believe it's going to have much of an impact. If you look at their own revenue estimates for the tax, like they're very low.

10:43 So they don't really expect this to be a big impact on demand. Well, we have some models so we can simulate, you know, put a tax on investors, what might happen. The share of sales, like the purchase and sale within two years, the government says 7%. It's actually usually closer to like 10, 11%. The share that purchase and sell within a year is like 3%. And within six months is one and a half percent. So like, who are the actual flippers that are going to get caught by this? It's not someone who's selling their home after, you know, holding that for 18 months, right? They're most likely going to be selling because they're changing jobs, their marital status changed, their family grew, like something that's going to be exempted. There's a pretty long list of exemptions.

11:24 Then you have people who renovate a home and add a basement suite and then sell it. They've added a unit of housing. That's an exemption. So in that, like, say, 10% within two years, it's a very small portion that are actually going to end up paying this tax. And it's probably those that are buying and selling within six months, really just looking to take advantage of short-term market conditions. If that's true, just make it a six-month flipping tax. My problem with making it two years is now you're incentivizing some potential sellers to just delay listing at a time when we don't have enough listings. So, you know, there's all sorts of situations where a potential seller, maybe they bought a home 18 months ago and they just want to sell it. They don't meet one of the exemption criteria because there is no exemption for just like, I wanted a different house that doesn't qualify. So they're just going to wait. If they wait, that means listings are going to fall. We're going to get markets actually a little bit tighter.

12:07 So there is a risk, like there's no certainty with this, of course, but there is a risk that prices actually rise higher with the tax than without the tax, which is totally counterproductive to what they're trying to And you had some data too about property transfer tax. Like if there is a slight decrease as they're predicting, then it's going to impact the property transfer tax, which obviously decreases revenue to the province. Can you talk about that a little bit? If you have lower levels of transactions, obviously you're going to be collecting less property transfer tax. So I think they estimated that the tax would gross like $43 million. So $43 million dollars in flipping tax but then you have to account for lost ptt tax revenue so in sort of like a general revenue sense you're kind of 43 million here but you're losing you know 20 million or so here so probably only going to collect something closer to like 20 23 million dollars once this program's fully up and running and that's without even accounting also for like whatever the administrative costs are for the program, because I'm not sure how they're going to do compliance.

13:01 So I assume it's going to be like the speculation of vacancy tax, where when you sell your home, you just check a box on the exemptions and then they'll have to have someone come and audit. Like, did you actually get divorced? Did you actually get a new job? Show us your payroll jobs, right? So there's going to have to be some like, you know, bureaucracy around this where they check if you actually are allowed to have the exemption for selling within two years. So that's costly as well. I think there's some examples of like, I think the federal underused housing tax, whatever they call it, is actually losing money after compliance and administrative costs. Really? These things aren't always cheap to do. So there's a good chance that with all those costs and the lost PTT revenue, that, you know, there's close to zero or negative.

13:41 I mean, the premier said, like, I hope this does have zero revenue. That means, you know, there's no flipping happening. Right. They don't think it's a big revenue driver, and it's not going to Yeah. One of the other policies that came out, and I think we spoke to probably a month or two previous to this coming out, was the short-term rental legislation. How do you feel about that? Changed a bit. When it first came out, I was like, I looked at the data. There's two pretty neat studies done, one by McGill that I don't think is that good and one by the conference board that I thought was pretty good. But they actually both came out with pretty similar numbers in the total impact on rents. It was pretty small. I can't remember what the exact number was. But basically found there wasn't a whole lot of upward kind of pressure on rents from short-term rentals.

14:23 So in my mind, it's like, all right, well, these aren't really doing much, getting rid of them is probably not going to have much of an impact. It's only about 15,000 sort of frequently used short-term rentals. But then I talked to some people around the province and especially like where you guys are, like there's a lot of cities in the interior that really rely on short-term rentals and don't have hotel capacity and it's a major tourism so like i always got the tourism part of it like that made sense especially you know in bigger cities but it's a huge deal in like penticton or somewhere like that that has very little hotel capacity and a lot of people who really have built businesses renting out places for tourism. I think that's a big thing. And then the one thing that really swayed me against it, or at least swayed me in favor of like a lot of carve outs is in places like the North and the Kootenai and parts of the interior that are somewhat healthcare deserts.

15:10 There's a lot of people that need to travel, you know, stay in their hospital and the family comes with them, you know, husbands, wives, whoever, like Prince George has the only cancer clinic within hundreds of kilometers in the North. And those require long stays and they don't have a lot of hotel capacity and hotels are expensive. So there's a really good argument to make in a lot of these areas that they badly need short-term rental markets. Whatever the rule is now, I think it has to be two months or three months or whatever it is. It doesn't make any sense. If anything, that rule certainly needs a lot of revisiting and some significant carve-outs. Interesting. I mean, you post some awesome stuff and it's mostly data-driven. So we love your input on that. Kind of back to the rate, I guess, you also put out something a few hours ago that you shared with us, Bank of Canada, new neutral and mortgage rates. So it kind of looks like bond market or our fixed rates are fairly stable moving forward for the next three years.

15:55 Like we've already priced in the amount of reductions that are supposed to happen, I guess. Is that what you're looking at? Yeah. that what you're looking at? So one of the things that the Bank of Canada did today, Yeah. what they do every year is they reassess what they think the level of the neutral rate of interest is, which is kind of a wonky macro idea. But it's the idea that there's some level of interest rates or policy rates the Bank of Canada sets that is consistent with inflation being at 2% over the medium term, and there being sort of no slack in the economy. So in jargon, you mean, you could say there's zero output gap. So there's some level of rates and they provide a range because of course, this isn't observable and there's lots of uncertainty around it. So they provide a range. It used to be between two and 3%.

16:36 So if you're thinking, most people that kind of watch the central bank and like, all right, where's the bank headed? Well, long-term, they think their policy rate should be between two and 3%. So they're probably going to go to 2.5% at some point, right? They think that a rate that's consistent with inflation being at 2%. Today, though, in their reassessment, they actually raised that range up to a range of 2.25% to 3.25%. So I've been doing this for years, looking at what's like a neutral five-year fixed rate. So basically, if you just say Bank of Canada is at their preferred level of long-term policy rate, and then add in historical spreads, you can get kind of like a neutral five-year fixed rate. And right now that's like 5.1%. And that's exactly where five-year fixed rates are, which would mean like they've already priced in all of the Bank of Canada's rate cuts.

17:20 The old neutral was like, yeah, maybe rates would fall back down to like 4.85, right? Or kind of around there. But where they are right now might just be where we're at long-term if the bank eventually cuts to 2.75. It means there's maybe not much more to go in terms of relief on five-year fixed mortgage rates. It's this really interesting thing where like, everyone's sort of waiting for the Bank of Canada. When's the Bank of Canada going to cut rates? Maybe they're not going to wait until And it's June. well, like, five-year fixed rates have already priced in all of the potential rate cuts that might happen. So why are we waiting? This might be as good as it gets on fixed mortgage rates. So is your prediction that the fixed mortgage rates are going to stay at this level for a couple of or is there upward pressure? It's tough, right? Like just in that theoretical framework, like that's what you would conclude. Like, do I think the bank of Canada is going to be at 275 for several years?

18:04 Probably not. We always have shocks that hit the economy, good or bad, that cause them to raise their lower rates. But it's a good indication of where they're going to kind of oscillate around, right? You know, unless we get a major shock that causes the bank to really cut below neutral, maybe they'll cut all the way to the bottom of that range though. Maybe it's 225. Maybe five year fixed rates fall into fours. But as of now, it's a pretty good rule of thumb where rates are going to If nothing changes globally, there's not a bank collapsing in the States and pandemic. It's hard to price that stuff in obviously. COVID-24. Yeah. There was a really interesting chart. It was actually done by Rob McAllister and I saw you reposted it. So he's got five-year fixed priced in 2025. It's looking at a 4.75-ish range, which I thought was very realistic, but his variable rate was down to 4.2, which is to me seems like incredibly optimistic, I guess.

18:50 How do you feel about that? would be, so right now, prime is 7.2. Take 200 basis points out of that, or 225 basis points out of that, then I guess we're around in the fives, 4.95, minus 50 or 60 basis points for the discount. That's not unreasonable. Yeah, okay. So I guess that's kind of the question we talk about at least, you know, when I'm speaking with clients is should we do a five-year fix? Probably not. But I mean, by some of this data, we're kind of thinking this is the best it's going to get, but a lot of clients will throw them into a three-year and hoping that in three years it is lower. We're almost anticipating like, Hey, do a three-year fix. And then maybe there'll be an opportunity on the variable side in three years, but probably not on the fixed. One and those things where then if you think in three years, the bank of Canada is going to be at its sort of neutral level and then maybe starts to creep higher.

19:35 I don't know. Is there how much downside is there to rate after that? So it's tough. There's so much uncertainty with rates. It's going to do well for just the market to get its head around the fact that we're probably going to be, for the next few years, at a five-year fixed rate that's like high fours, low fives, instead of the past decade where it't really seen rates like this. Or if they're like a new home buyer, especially or move on the last 10 years, haven't had a rate environment like this. So it's going to take a little while. And it's interesting, like in the Okanagan market too, like things are a lot weaker in the Okanagan than in a lot of other areas. It's one of the only markets that I think is trailing behind 2023 through the first quarter and our economy is quite weak.

20:23 So whatever is going on in that area, like things look a lot weaker than some other markets in BC. Like, what do you think that is? Because we had our municipal government add more, like we were talking about short-term rentals before, like when this David Eby came out with these rules, city Kelowna Army went and added more restriction onto them. Seems kind of crazy looking back at that already, but is that a catalyst to this? What other factors could there be? I don't know. It's really hard to, when we're talking about regional economies, because the data is pretty noisy. So if you're someone like me, it's like, I'm not there. So it's hard for me to tell what's going on. All I can say is the data that I see, sales are pretty weak. if you're Listings are pretty weak. Listings are pretty weak.

21:03 Job growth is very weak across the interior. So again, that is pretty noisy, but that is Do you think like we're a destination town, right? So like we have people come from Vancouver, from Alberta, from out east. Like you wonder if like the excess funds to come here are just not there right now because of these interest rates and it's just us first. Yeah, we have seen a lot of outflows of migration to Alberta. So we, for a long time, had a lot of, especially in the interior in the Okanagan, had a lot of people coming in from Alberta because their economy was so weak. And that's largely reversed in the past couple of years where now you have a lot of people, for affordability reasons, for a lot of reasons, going back to Alberta or going to Alberta for the first time to look for both housing and job opportunities, that could be a part When you're saying the data is trailing in the Okanagan or interior, is it listing, sales, average home price or everything?

21:53 Like what's slow about it? It's mostly sales. So I'm just looking at it now it's like literally down like 30 well for the after the first quarter over quarter in the okanagan sales are down 14 and they were really slow last year so that's 14 below an already pretty terrible start to 2023 cam loops is down two percent so not quite as bad, but for whatever reason, like the Okanagan, kind of Kelowna, Penticton kind of area, Shushua, I don't know, is a lot weaker than a lot of the markets. Like the lower mainland is up 15% over last year. Last year was really weak, so that's not a great number, but it is tracking ahead of last year. For whatever reason, the Okanagan is like the one market that's like really to work, man. We need to pump some optimism into this market, man.

22:34 Taylor, you guys, let's fall on your shoulders. Yours and I's. I I'm doing my best. Maybe it's again, like overall, like in the province, the first quarter was a pretty weak quarter for sales. We're at like a 65,000 sale pace for the province, which is really bad. An average is like right? 85,000, So we're like way below normal. April's looking a little better in some markets from the early early, data I've but it's seen, a really slow start. And it's not quite what I expected. You know, last year when we had the Bank of Canada pause, clearly state they were on pause, which they then of course ended up raising rates again. So maybe buyers are just kind of gun shy and they're just like, they want to see actually lower rates before they get back into the market. Not sure, but there seems to be a bit of a psychological block Does your software break down like single family houses and condos?

23:17 Because I feel like the condo market here is incredibly saturated or it's becoming saturated do you see any data on the single family side we mostly just look at the aggregates we're putting out our for our kind of spring forecast in the next couple weeks where we'll do a more detailed dive into product type i think in the okanagan it's just kind of everything is weak it may be 14 below and already pretty slow paced. It's GDP, is it getting worse essentially? And is it specific to the Kelowna market? Or do you track really down to the municipal level or are you more provincially? No. So we what we call a nowcast where we track economic growth in the province as close to real time as the data allows. So, you know, jobs data just came out for March.

24:01 So we have a decent idea like what March growth looks like. It tends to track economic growth really closely at the provincial level. Once you get down to regional levels, the data is a lot noisier. It's also a lot less available. So you have to end up using a lot of proxies for things. What it tells us though is like the Okanagan pre-pandemic was growing a little faster than the rest of the province, which makes sense. Slowed along with everything else during the pandemic, had a nice rebound, but in the last year has really started to falter. So I think our most recent estimate for year over year growth in the Thompson Okanagan, so including Kamloops, it's like zero for January. So started the year like close to like recession territory. The North looks like it had a recession last year the kootenai is pretty weak lower mainland seemed to be growing pretty strong a lot of that's you know really strong population growth you know a lot of people migrate into vancouver and fraser valley and places like that but most markets seem to be at least in the kind of slow growth or recovering from a more challenging 2023 the okanagan is the one that is actually deteriorating like it's not either stabilizing or recovering it's still deteriorating and again could just be noise in the data but it's something worth investigating because for whatever reason that economy seems to be struggling it could be like when i dig into it like somewhere it's the employment data for like Kelowna is really weak.

25:17 It's very seasonal, but even taking that into account, it's still like jobs. I think we're down, I think like 20,000 jobs or something year over year. I can't remember what the number was, but like it was something that was like So. Interesting. Does the government step in at any point when municipalities are really like, do they wait specific cities anymore? Or is it just purely based on the average population across Canada? Here's our GDP, here's our inflation. This is what we're trying to balance out. Or do they go, oh my God, Kelowna is struggling. Maybe we should change something locally to incentivize business there. a good question. I mean, so much of that is municipal. You see those fights right now over housing where you have the province telling municipalities, you need to adopt either our zoning or as good or better in your municipalities.

26:03 Or essentially, we're taking over or you have the federal government saying we're only providing funds and their housing accelerator funds for municipalities that are making the right kind of moves on zoning. and accelerator funds for municipalities that are making the right kind of moves on zoning. So a lot of it is that it's sort of incentive based, but there's only so much control the provincial government has over municipalities. And there's only so much you can control, like, you know, sometimes economies just are volatile. And especially ones like the Okanagan is, you know, sort of diversified, but also still can be hit with, you know, weather shocks and that kind of thing. Right. So it's hard to to say i wouldn't be super concerned until it's like a multi-month trend given how noisy the data is but it's just something worth flagging that things look a yeah i mean we did just have ben stewart on he's the founder of quails gate and i mean we talked about the wine industry because obviously we caught kind of hammered this winter so that's gonna hurt short-term rental is gonna hurt it's a big grant headwinds right yeah that's all i hurt.

26:54 Short-term rental is going to hurt. It's a big grant. Headwinds, right? That's all. I think that things are going to start recovering in the second half this year for the province as a whole. And I'm sure that'll apply to the Okanagan as well. Like it's going to be a slow year of growth in the province. We're forecasting like one, one and a half percent this year. A lot of it is like consumers just aren't spending money. It seems like maybe the anecdotes out there, or even if you like go to a restaurant or people can be traveling a lot. So it does seem like they're spending money. But then when you look at the data, they're just not. Retail sales were negative year over year to start the year in BC.

27:37 We were tracking consumer spending, which is like two-thirds of GDP. We were tracking it last year at 1.8%. It's usually around three. So it was just weak. And at the same time, people, they're not spending, but they're really saving. The savings rate in Canada fell for a decade, starting in 2010 until the pandemic. Pandemic happened. We had this huge buildup of savings. But we're not seeing that savings drawn down either. Right now, household savings is still 5% to 6% order. So it went from basically zero pre-pandemic to like six percent of income post-pandemic so people are like cautious i don't know what if it's like worried about mortgage renewals just worried about the economy in general whatever it is it seems to be driving people to save rather than spend and that means we're going to be growing kind of slow so is this exactly what interest rates are supposed to do is just kill all these things sure yeah this is how are supposed to do?

28:29 Is this kill all these things? Yeah. Sure. This is how monetary policy works generally. Yeah. The interesting thing this time around, like we've had sort of the demand impacts you'd expect from higher rates, but we haven't really had the labor market impacts. So like until recently, the unemployment rate was still really, really low. We managed to get inflation down from over 8% to under 3% without really much of a change in the unemployment rate. It bottomed out in June of 2022, I think, at like 4.9%, which was an all-time low. Until March data, we were at like 5.8%. So it got up a little bit, but like nothing concerning. Now we're at 6.1%. It's starting to flash a bit of a warning. But like, it's been pretty interesting. The economy has been slow. We didn't have a recession, but it's been really slow. So like net interest rates are having an effect. The labor market, you know, still doing okay. The unemployment rate again, until the most recent month was still very low. Wage growth is really high in BC as of March, like the year over year growth in average wages was something like 8%.

29:09 So even if you strip out inflation, that means like a 5% increase in wages year-over-year. It's pretty strong. But it seems like people are taking those wage gains and just saving them, not spending. So is this setting us up pretty good for the future, though, to have everyone saving money? I think so. I don't want some confidence returns to driving consumer spending. People are like, you know what, I'm thinking the economy's going to be okay. Rates are coming down. Inflation's not as high. Maybe it's okay to go out and spend again. If that's the sort of the psychology, then yeah, we should see a recovery and people should be spending a lot. There's a lot of savings to draw down over the next few years. Can you just tell us when it's okay to spend again? Maybe put a post on LinkedIn and be like, hey guys, you're good. Don't tell my wife. Fascinating though, like in the United States, they had the exact same pattern of like this huge accumulation of savings during the pandemic, but they're really spending it down.

29:56 Like they're drawing down, I see household spending and savings rate. It's well below sort of what it was Thanks Biden. Yeah, well, the government's out spending money and households are out spending money. They're a fascinating country. You ask them like, hey, how's the economy doing? Like, oh, it's terrible. And they're like, how are your personal clients? Never been better. It's this weird disconnect where like everything is political. So they can't, you know, they've been places a you know, they've been places a mess. Okay, we're talking about the US. This is a perfect segue. Like I've been hearing that the Bank of Canada basically can't lower rates until the Fed does. Is that true? And why is that? It's not true. So one reason why the Bank of Canada doesn't necessarily want to get too out of sync with the US is if we lower rates and they don't, international, global capital, if you're looking to save, you're going to go to where rates are higher.

30:39 Maybe Canadians are going to save in US treasury bonds, whatever. Tends to put downward pressure on the Canadian dollar, people get out of the Canadian dollar into the US dollar, and you get a higher rate of return, right? So it puts downward pressure on the loonie, which means that import prices, which we import a lot in the United States, our import prices go up, and that tends to drive inflation higher. So there are some inflationary aspects about falling exchange rate. It tends to be inflationary. Obviously, when we're already concerned about inflation, we don't want extra, we want to be importing inflation because of the exchange rate. That's one of the reasons why we'd be constrained. That can only go so far. Like if our economy is really deteriorating, and usually the Canadian and US economies are really in sync.

31:21 Like our business cycles move in lockstep. They're not right now, which is kind of fascinating. Like they created about 300,000 jobs in March. We lost 2,200 jobs. Their unemployment rate is 3.8%. Ours is 6.1. Like there's a divergence happening where their economy has been growing pretty strong and ours has been really weak. So that means that monetary policy probably has to diverge as well. We're not tied in a fixed exchange rate way to the US dollar. We have our own monetary policy. We have a loaded exchange rate. We need to do monetary policy that fits Canada while keeping an eye on the United States. One interesting thing is that movement in the neutral rate is actually entirely US driven because they've been growing so fast. And because we're so tied to US interest rates, the Bank of Canada raised their neutral rate really based on an increase in the neutral rate in the United question? I feel like I always ask you dumb questions because you're incredibly smart.

32:03 Where are they getting the data from unemployment? Like 6.1% seems to I you would be, almost mean, feel like I always ask you dumb questions because you're incredibly Where are they smart. getting the data from unemployment? Like 6.1% seems to be, I mean, you would almost feel like you want to double check that number because are they just looking at people who are applying for EI or like, where is that coming from? There's two sources. One is the labor force survey. It's a survey, call you up. Do you have a job? How much are you working? What's your average wage? So the way we normally track things. The other one is from payrolls. So the actual payroll data, they're slightly different measures because labor force includes self-employed and farm workers and that kind of thing. So the payrolls data, I think it's mostly just what we call business payrolls versus self-employed and farm payrolls.

32:44 So there's a bit of a difference. If you call up someone who's self-employed and says, do you have a job have a job they're like yeah but they're not going to show up necessarily on businesses right you know so there's obviously some room for error but you know if this is the average that it's been and it's trending yeah there was a time in bc where like that we'll call sef data so the survey of employment payrolls and hours some of this sef versus lfs anyway in bc there was a point like when i first started like maybe it's like in 2013 or something where like one of them was saying that employment was growing like three percent and the other was saying that employment had like declined so it's like all right cool like what kind of an economy is it then like is it terrible or really good yeah there's always going to be noise.

33:30 Yeah. Moving into kind of the next few months, I'm going to rephrase this question because I know last time, you know, you had the economist stance kind of. You used up your dumb question. Yeah, I know. No, this is a really smart question. What would you do if you were TIF at the next Bank of Canada announcement? I mean, having the data we have now, would you make a cut? Based on what we're seeing in inflation and the job market, I would cut by 25 basis points in June and July and to the end of the year. Like one per or like just one? Each 25 basis points each. I mean, here's the thing a lot of people don't maybe necessarily get. Like, you know, we talk about monetary policy is that everything is in reference to where the bank wants rates to be long term.

34:15 So even if they cut by 100 basis points by the end of the year, that's still an overnight rate of 4%. That's still pretty restrictive. That's higher than their neutral 2.75, right? So ending above 2.75 right now, they're still pressing on the break. They're just not pressing on it as hard. So until rates get down to 2.75, we're still in pretty restrictive monetary policy range. It's not like, oh, rates went down 25 basis points, and now it's a free for all in the economy, and inflation's going to start heating up, right? This is still having a dampening effect on the economy. As long as rates are above neutral, you would expect growth to be below trend. You'd expect inflation to be, it's going to be falling, I know they're mandated by keep inflation at their target range, but let's say, you know, unemployment continues to go up and we're at 10, 12, 13%. Is there something in there that they're like, okay, we need to stimulate the economy. Like who cares that inflation's, you know, where it's at, but.

34:56 I mean, it'd be pretty wild if we had 13% unemployment and still had inflation. That'd be like an absolute nightmare scenario for everyone i guess it's not dissimilar to what we had in the 70s we had yeah i was say a supply side shock from oil prices that drove inflation really high we're not really in that same kind of economy now but you i guess you could draw some scenario where like, well, kind of like the pandemic where we have a huge supply shock that causes prices to rise at the same time. People get thrown out of jobs where you could have spike in both. We didn't necessarily see that during the pandemic. The inflation effect was after. But yeah, in that situation, they lowered rates, right? In that situation, you think, well, this supply shock is temporary. So we need to address the demand All right. Since we used to get dumb questions, I have one.

35:38 was That was like a fourth-year macro. It was self-rated. The story question was pretty smart. It was great. It was self-rated. When it comes to house pricing and the housing market, what is the goal? Does the government want house prices to rise with inflation a little higher? Do they want them to stay the same? Do they want them to lower? It feels like depending on who you ask,'s a different answer what they want like what's the here for the house like long i don't think they'd ever tell you what they want like home price growth to be the makeup can certainly won't at least past the point of saying we want prices to fall which i think a couple of at least a premier or maybe house minister said at some point yeah they don't tend to say that anymore. What I would like, what I think that the government would like, is that if we could have prices growing in line with incomes or in line with inflation, it would be great.

36:24 The historical average increase in prices over the past 30, 40 years is like 6.5%. And if prices grow 6.5% on average every year, they double every 10 years. That's really unhealthy to have prices doubling that quickly. If we could get 6.5% on average every they year, double every 10 years. That's really unhealthy to have prices doubling that quickly. If we could get 6.5% growth down to like 2% to 3%, then that's like maybe home prices double every 30, 35 years. That's much more sustainable. I think given where prices are at, like we need prices to move kind of sideways and allow incomes to catch up. It's pretty unhealthy where we're at right now with where affordability is at. You know, self-interestingly, I have teens, 16 and 18. Eventually, they're going to need to move out of my house.

37:05 And even if they wanted to rent, like, that's crazy expensive everywhere, right? So, like, there's just no good options. So, we need to have enough. I mean, and the answer is no surprise. I'm going to say, like, we just need a lot more housing. We need a lot more of a lot more of housing then this wouldn't be such an issue so since we don't like i know that the projections are we just can't build enough houses like it's just not possible like are we going to see six and a half percent appreciation obviously not this year but like in a few years it's like a forecast if you had no other information what would your forecast be like growing population and especially a lot of people that are forming households for the first time, 27% of the population are millennials. You guys, I think you're both millennials.

37:46 Yeah, we are. There's a lot of you in Kelowna, a lot of you all over the province. Yeah, but we're the best. Yeah. They would probably like to have their own home in some way. Yeah, yeah. That demand is pretty relentless. We just need somehow to get supply to keep up. Most recent government modeling is they think they can build 550,000 units over 10 years, which would be about 250,000 more units than is currently kind of the baseline. That would be great. That would work. It would take a very long time to work because it takes five or six years to build an apartment building or a bunch of row houses, but it would work eventually, right? That would cut the rate of price growth down considerably. Whether or not we can do it, we start to really dig into the particulars, like about 8% of the current workforce works in construction.

38:30 That would probably have to rise to build that much more housing. The problem being 50% or so of the construction workforce is 55 or over. So a lot of them are going to be retiring. Interesting. So we need to either encourage young people to get into trades because there's going to be a lot of jobs available, or we need to ramp up immigration specifically of people in skilled trades. But of course, that adds to housing demand. So it's a pretty difficult situation. The other thing is on the construction productivity is falling, which means we getdp out of each hour of labor worked in the construction sector generally because we're just really inefficient at let's ask one question on that like because we have our codes are just getting crazy that we have this inefficiency you're like overall productivity in canada is really low i'm sure there's all kinds of regulatory reasons why that might be true in the construction sector. Some of it is like, sometimes I equate and I'm far from an expert.

39:10 I can barely swing a hammer. Probably couldn't tell you what types of hammers there are. So sometimes I think about building houses like toasters. The technology hasn't really changed. A toaster still toasts and it still takes just as long as it always has and like building a house and still like there were people building a house behind us and it was just like two guys would show up at the work site and they were just there all day hammering and whatever it's like man like there's got to be some like technological improvement here where this could have been done way you didn't get ty pennington to move that bus. That's not. What's there in construction? Like, that's going to suck. Because I am. I don't know what I'm talking about, except just like that observation. Like, it seems like there's not a Yeah, yeah. I'm just thinking, going back to the supply and demand issue, do you think that there's a risk at all that we're so unaffordable in the housing sector that immigration is going to essentially come to a halt and we're actually going to catch up with supply? Because how does population continue to grow at this pace if somebody lands in the country and they're like, I can't afford to be here.

40:05 I'm going to a different Yeah, it hasn't stopped yet. Vancouver is kind of known to be pretty expensive and we still have very high levels of immigration. We will have though, because the government announced they would like to get the share of non-permanent residents in the population down to its current level of six and a half percent, down to five percent like in the next three years. Which means like we had an inflow of about 850,000 non-permanent residents in 2023. To get down to five percent of the population, we need an outflow of like 150 to 200,000 people every year. So instead of all of those students and temporary foreign workers coming into the country, now they're leaving. It's a swing of like a million people. That should have some real implications for the rental market. Like it shouldn't be as hot over the next few years as it's been with a lot of people leaving that tend to rent. So, you know, part of it, we'll start to see that in the next year or two.

40:46 We'll see if what the effect on like permanent residents is, though we still have a very high target for them, right? Till 2027, so. I got one more dumb question to finish up and then we probably got to let you go. This is is your third one, man. going to stop saying the dumb questions though. My wife has trained me well yeah yeah okay if you could tell david eb one thing for a policy change like brendan augmentson gets to make one policy in 2024 what would it be uh the bank of grizzlies yeah honestly like the stuff that they're doing right now with the supply reforms are exactly what I would have said two, three, ten years ago. God, they're kind of late, but I think they are doing the right things. And we should have been doing them ten years ago, but better late than never.

41:28 Yeah, I'd agree with that. All right, Brendan, want to stick around for our few questions that we have? I think we have four. Those are not dumb questions. No, no, these are. By the way, that question that you asked was awesome. That was definitely a smart no, are. It's only because I've set the expectation that it's dumb and then it comes off not so dumb. Yeah. Yeah. All of our guests get to say one policy. Man, we've had some wild shit. We already got the Grizzlies back. There you go. That would definitely help the economy for sure. Yeah, yeah. of Well, it's such a different time. Like, you know, now, like, Vancouver's pretty basketball crazy. Like, basketball's gotten so much bigger in the last 20 years.

42:08 I think that they would easily be able to sell off those arenas. totally. All right, Brendan, if you could buy one property in the Okanagan, what would it be? Like, down to the address? You asked one of my This is how Matt sells houses. I that much of a question. I don't know. Waterfront would be fun. Would you answer anything else? Does anyone ever I don't know. like, Does anyone ever I don't know. like, We've had a lot of different answers. Like we've had big white waterfronts. I don't ski and I don't really do anything on the water, but I do like to look at it. You just need a house with a view then. Yeah. If you could tell your 20 year old self one thing, what would it be? Oh my God.

42:50 They asked me this, maybe one of my first times on the vancouver real estate podcast i think i just said like relax like a pretty uptight 20 year old so yeah i think that's probably good advice for younger birth that is are there any charities around that you support or that supports yeah know personally we support the dan syndrome research foundation a resource foundation i guess they've changed the name and children's hospital and there's also a really great one a mother who provides gift baskets to new parents with kids with dan syndrome which is so like with like you know all types of information and toys specifically designed for kids with dan syndrome so what's called baskets of love that's a great one if anyone's looking for a really good very a really good very cool how can our listener connect with you? I mean, obviously you're pretty vocal on lots of platforms, but yeah, what's the best way? Only vocal on LinkedIn.

43:34 I'm not on any other social media. I think LinkedIn is like the least toxic. It can get a little ridiculous sometimes, but it's easier to avoid that stuff on LinkedIn than anywhere else. So, you know, that tends to be like a good place where like a lot of people, you know, like to read posts up and seemingly migrated a lot of stuff there. So it's high frequency. So you're not scrolling through. I heard a stat that the average person scrolls through the equivalent of 350 feet of text every day. If you like printed it out, that's what it would be like. So like the size of like a skyscraper you're just i think that may be correlated to the inefficiency of art that's what what everyone's doing post like i don't know once or twice a week sometimes less sometimes more on linkedin so i don't think i've ever said no to a request on linkedin so connect don't tell them our secret that's how I got you on the show the first time.

44:23 Oh my God. This guy actually said yes. Yeah. Okay. Well, no, this has been another great one. We look forward to having you back and yeah. Thanks for your time. Yeah. Thank you so much. I'm voting for you for next bank of Canada. We'll get you in there. Oh, I don't think it's a Well, no, this think it's a vote. I know it is. Yeah. We're making a it is. Yeah. We're making a campaign out of this.