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Is Canada Overdue for a Recession?

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The current economic cycle is getting very long with the last recession happening 10 years ago in 2008. Are we not due for another recession soon? Andrew gives his highlights of what CIBC economist Benjamin Tal had to say about this question and many others at a recent private presentation he gave to Toronto Real Estate Board members.

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Andrew la Fleur: Are we overdue for a recession? Find out on today’s episode.

Announcer: Welcome to the True Condos Podcast with Andrew la Fleur. The place to get the truth on the Toronto condo market, and condo investing in Toronto.

Andrew la Fleur: Hi, and welcome back to the show. Thanks for tuning in once again. Make sure that you’re not just listening to the show, that you’re actually subscribing to the show. Hit subscribe on your podcast app, whatever you’re listening to this on, your iPhone, your Android, whatever it is, make sure you don’t miss an episode, and also make sure that you are subscribed, and receiving our weekly email updates on all thing’s condo investing, so just got to truecondos.com, and sign up anywhere on the site there to make sure you’re getting my weekly emails.

On today’s episode, I want to talk about the economy, and diving deeper, specifically, into are we do, are we overdue for a recession? I was at a talk recently by Benjamin Tal. Benjamin Tal is the deputy chief economist for CIBC World Markets. He’s actually been a guest on this podcast way back in the day when the podcast was in the first six, or 12 months, or so when I just started up this podcast, and it was great having Benjamin Tal in there. He’s one of the great economists that we have here in Canada, and he’s really in tune with what’s happening in the real estate markets in particular, just a great guy to listen to, a very entertaining speaker as well, so if you ever get a chance to listen and hear from Benjamin Tal I definitely recommend you take advantage of that.

I had a chance to hear from him this week at the Toronto Real Estate Board, all the realtors, real estate agents, myself, I am one, of Toronto had a big event, a big meeting, and thousands of realtors there, and they had Benjamin Tal as sort of the keynote speaker for this event, so it was great to hear what he had to say live and in person about the economy. He spoke for about 45 minutes, it was a great presentation. If you follow me on Twitter, you probably would have seen a lot of my live tweets that I put out about when I was listening to the presentation at the time. I’m going to go through some of the key points that Benjamin Tal brought up.

The big question he addressed right at the beginning was are we do for a recession? That’s the first point I want to talk about and what he had to say about that. Basically, the theory that is gaining steam and momentum in the wider marketplace right now is we are overdue for a recession. It’s been, the current economic cycle that we’re in has been ongoing basically since, you know, well, the recession hit, the last recession hit in 2008, of course, barely hit Canada, but it did affect most of the world really badly.

Basically, since 2009 the Canadian economy in particular has been in expansion mode, has not been in a recession, and so we’re at about, almost, 10 years now of not having a recession, and you know most people sort of would say recession is every sort of seven or eight years or so, that seems to be the cycle. There’s always a downturn in the economy. We’re not seeing that. In fact, the US growth is now at 4%, which is the highest it’s been in a long, long time, and obviously we generally follow what the US is doing.

Canada’s raising interest rates, job market here, and everything, seems to be a lot of positive signs out there. Is this it? Is this the peak? Are we at the highest point? Is the economy about to take a turn? Benjamin Tal answer to that question, is no, we are not, recession is not eminent. Yes, this cycle that we’re in he says is very long, but he believes that this will be the longest cycle, ever, as he was sort of saying and joking, half joking, that this time it’s different. Basically, his point, his thesis is yes we have been growing for 10 years now, it’s the longest cycle we probably ever had so far, and it’s going to continue, he says.

If you actually look at the growth that’s taken place over the last decade, it’s hardly anything at all. We’ve hardly grown at all. Yes, we’re growing, but hardly at all, so there’s no inflation in the system. There’s very little inflation in the system. Inflation, he says is the thing that kills a cycle, that when the inflation gets too high, and too hot, that’s what kills a cycle, and that’s what makes it sort of all come crashing down, but there’s very little to know inflation in the cycle, basically.

We’re not seeing, especially, wage growth, so he says the wage mechanism is broken in the economy, there’s more jobs being created than ever, but people are not generally making more money, and he goes into different reasons for that, but basically that’s his point. Until we start to see big wage increases, that really drives inflation. Until, you see that inflation really ramping up, the cycle is going to continue, basically, is what he’s saying.

Second point, interest rates. He was making a cautionary tale to the Bank of Canada, and Central Banks, don’t raise them too fast, he says, big policy mistake of the past recessions were when policymakers raised interest rates too much, too soon. That is the thing he said that always contributes to an economy turning, and crashing, and going into recession. In his talks with Central Banks, and everything, that’s what he’s telling people is be careful, everyone’s talking about raising interest rates, and we’re going to keep doing it, and he’s like, you know what, take it easy, the economy, yes, it’s growing, but it’s barely growing. Basically the theme is it’s not as great as it may seem, some of the headlines.

Number three. Overall, the global economy, looking globally around the world, it’s not great, he says. Looking at 2018, only the US, only the United States has met expectations, basically, every other major western global economy has not met expectations, that was an interesting point. Something to think about. Number four, he says, in 2020 expect the US slow down, so that sort of his, you know, if there is going to be a recession coming or a slowdown or something, he’s saying, look to 2020. 2020 vision as he joked about it, you had to be there, anyways. He’s basically saying, look, all the stimulus that the Trump administrations putting into the market, they’re really putting gasoline on the fire, he’s saying, basically, and it’s setting up for potential danger in the future with all this stimulus in an economy that’s already sort of moving in the positive direction.

He’s saying, it’s unusual for that sort of thing to happen, like obviously normally stimulus is associated with an economy that’s going in the wrong direction, you’re trying to wake it up, but he’s saying, putting stimulus on an economy that’s already sort of positive, you’re going to have to pay the piper down the road. When they remove the stimulus, basically, he believes around maybe late 2019, something like that, then expect a slowdown in the US in 2020, as there is sort of a hangover effect to that stimulus being removed from the economy.

Number five, demographics. Demographics is a big theme, and it’s something that we should all pay attention to as real estate investors. What’s happening demographically in the areas we’re investing in? I big theme across Canada and basically all western nations is as he said is they’re getting old, the biggest growing segment of the population is the oldest segment, so sort of the 50, 60 plus segment is the fastest growing segment of the population.

He says, this is a very anti inflationary force, anti inflationary force, think of it like this, if you’re in the workforce, and you’re in your 50s, and 60s, you know, you’re past the peak of your sort of working days, and generally people in their 50s, and 60s they’re not getting raises, they’re not getting promotions, they’re not climbing the corporate ladder, and asking their boss for another 5,000, or 10,000, or whatever it is on their salary.

In fact, many people the older you get the less hours you tend to work, you start taking Friday’s off, you have longer vacations, and so on, and so forth. Your productivity generally goes down versus when you’re in your 20s and 30s, and you’re on the opposite end, you’re climbing up the ladder, and you’re looking to make more and more money, that sort of a thing. Demographically, all these countries, Canada included, are getting very old, it’s a very anti inflationary force.

Again, those people who are out there calling, and looking, and waiting for this big inflationary period to come, IE, as real estate investors when we talk about inflation, we’re talking about interest rates. Right? That’s the biggest thing in our minds, so if you’re waiting for these big, super high interest rates to come he’s saying, you know, demographically speaking it’s not going to happen. Like, we’re not seeing these big inflationary forces out there. In fact, we’re seeing the opposite.

Number six, this is an interesting comment on just the economy in general, and how it relates to the education system. His point is basically that we’re failing young people in Canada. I would a 100% agree with this. I think the education system is broken, as an entrepreneur, as a real estate investor, as a business person, as a small business owner, and I know many people out there are listening, and coming from a similar perspective, the education system is broken.

I mean, the education system is, not to get too much on a tangent, but it was basically created in the industrial era. It was created a 100 or a 150 years ago, the model hasn’t really changed, and even though the entire world has changed. It was created to essentially set you up to work in a factory, to be a cog in a machine, and to listen to instruction, and to obey orders, and to punch the clock, and go home every day, kind of thing.

That is not how the world works, anymore. We are in a result’s economy now, and the people who are getting ahead and the massive gap that’s growing, and growing between the very, very rich, and the people who are either poor, or just barely, you know living paycheck to paycheck, $1.00 to $1.00 that gap is growing, and growing. The people who understand the new economy, and the people who are producing results are richer than anyone in the history of time, but most people are still stuck at the bottom, and so the middle class is really being squeezed out.

Anyways, we’re going off on a whole thing here, but basically his point was the education system is broken, it’s failing young people. We’re not matching, we’re not getting people the skills they need to match the vacancies in the economy itself, so we have all these empty jobs for certain skills, and we have all these overeducated young people basically getting arts degrees and things like that, that are not needed in the current economy from an economic financial standpoint. Yes, of course we need artists, and we need people in all varieties of fields, but economically speaking people are being left behind, because they’re not matching, they’re not getting the skills they need, and matching with the skills that are missing in the economy. That’s very interesting, there.

He tied that into another point, which is around automation, jobs are disappearing, and again part of what’s happened in the economy it’s an automation story, so he’s saying for every one job that we lose to trade in the whole, you know, everyone’s talking about NAFTA 2.0, and free trade, and manufacturing jobs going overseas, and this is a huge theme right now in the media. He’s saying, that is just a very small piece of the pie, like the real story here is automation, and jobs being lost to automation, trade is, you know, it’s sort of, I think he said, eight to one, for every one job that we lose to a trade related issue we lose eight jobs due to automation.

Again, if you want to work as a cog in a machine, well that machine is going to be automated, and you’re going to be out of a job, or do you want to be the person who programs and creates the machine? That’s where you want to be, if you’re a young person, but that’s not what the education system is currently churning up. Those are some points just in the economy as a whole, and then he sort of moved into the real estate markets, particular, obviously talking to us as real estate agents, we all wanted to hear what he had to say about the real estate markets, so he talked about a lot of different things, I’ll just touch on a few points, here.

Number one, is again, this is a theme that we talk a lot about on this podcast, and that’s population growth, and the big news, headline, this week, again, was that it’s not news to us, because we already knew this, but immigration targets going up, big time, for Canada over the next few years, it’s going to be increasing to 350,000 target rate, 350,000 immigrants into Canada by 2021. In contrast, about 10 years ago, you’re looking at 250,000, so from 250,000 to 350,000 that is a massive increase in the level of immigration over a relatively short period of time.

Canadians are not having enough babies. We need to keep growing, and so immigration is how we do it, but what’s amazing about the type of immigration we do here in Canada compared to other countries is most of our immigrants are economic immigrants, this is not the immigrants of your parents, and your grandparents generation coming, you know the stories of coming to Canada with $5.00 in your pocket on a boat, kind of thing. So many of us have those stories in our legacy as Canadians, and they’re amazing stories, but that is not the type, that’s not the immigrant of today.

The immigrant of today is your economic immigrants, there are people with, their government is actively looking like going back to the skill’s conversation, those people with the skills that we are lacking in this country, we’re bringing those people in. They’re highly skilled, they’re highly educated, they come with money in their pockets, lots of money in their pockets, already, lots of skills, they hit the ground running. These are not the immigrants of the 1930s, ’40s, ’50s, and so on. That is to Canada’s advantage, and that differentiates us from other countries that don’t have such an emphasis on the economic immigrants, so Canada’s an amazing place to live, to come to.

It’s very attractive, we should, and we can, and we will, and we are being selective about the type of immigrants that we’re bringing into Canada, and that’s resulting in a benefit to our economy, and ultimately that benefits our real estate market. A lot of people talk about, “Immigration, who cares about immigration? An immigrant comes to Canada, and they’re not buying houses. They’re not buying condos. That shouldn’t affect the real estate market in any way.” Well, again, actually they are. They’re probably much more likely to purchase real estate than the average Canadian who was born here, because they’re coming in with a totally different mindset, they’re coming in with money in their pockets, skills in their hands, and just a general sense of wanting to move up the economic ladder very quickly. A huge part of that is buying and owning real estate.

Number two. Number two, is he got into condo investors, and the whole notion of the big headline that came out earlier this year, that 50% or 45%, whatever some number was that condo investors are cashflow negative on their investments, so our condo investors losing money, you know what’s wrong with them? He said, you know, we’ve done focus groups, we’re trying to understand the mentality of the condo investor, and basically, he’s like, you know what, they know what they’re doing, they understand longterm that real estate is a good investment. These are not short-term thinkers. They’re not flippers. They’re not trying to get rich quick by buying a condo.

They understand, basically that in the longterm, and this is what Benjamin Tal very much believes in, and how he actually concluded the presentation was basically making the point that in the longterm, in the GTA, we are not building nearly enough housing, we have so much immigration coming in, so much growth coming in, the overall economy generally is very strong, so over the longterm real estate prices in the 10 to 15 year kind of horizon, real estate prices will be dramatically more expensive than they are today.

That’s something he said at the presentation, and that’s something I’ve heard him say time and time again over the last six months or so. There’s going to be short-term blips, and he said, probably in the short-term the condo market is going to start to slowdown, because the low rise market has already slowed down, as we’ve seen. Condos probably should follow that next, but in the longterm real estate, especially in the GTA it’s going to become much, much more expensive. We’re not nearly getting close to covering enough new supply that will be needed to cover the population growth that is happening now, and that is to come. That sort of the main point, again, for you to takeaway as an investor.

Finally, he also touched on rent control, and just basically saying, again, he’s against rent control, he thinks it’s a bad policy. He says, he is lobbying and the bank, I guess, whatever they’re lobbying the government for, and some kind of an adjustment to rent control, so that it will encourage more rental supply in the marketplace, and that is, you know, he’s saying, instead of just inflation is the max you can raise it, lets at least do inflation plus 2%, something like that, is what he’s pushing, and lobbying on his side of things for the government, so that’s good to hear.

Hopefully, the powers that be are listening to Benjamin Tal, this podcast, and other people who are calling for similar measures, because we need more supply. Again, longterm, major supply shortages, not even close to meeting, I mean, immigration increasing, all things are pointing to the fact that real estate prices 10 years from now are going to be much, much higher than they are today. Keep investing for the longterm, never think short-term, it’s a great place to invest in the GTA, and yeah, hopefully you found this podcast interesting, useful, hopefully you got something out of it.

If you get a chance, like I said, check out Benjamin Tal, listen to him speak, go to one of his talks, or events, or go back and listen to the podcast from a few years ago, if you want to, I’ll include a link in the show notes for that episode, if you want to go back. I think it was episode 37, if you’re going back in the archives of this podcast, episode 37. I was much younger then. Okay. All right. There you have it. That’s today’s episode. I hope you enjoyed that. Until next time, happy investing.

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