E92: Tariffs, Interest Rates & Canada's Rental Market

“TN: There’s a saying common among economists that there are no winners in a trade war, and this is going to have a knock-on effect on not just Canada but the global economy as well, and in fact, with all the tariffs measures that came out yesterday, we’re expecting that there could be a global recession.”

[INTRODUCTION]

[0:00:20.2] ANNOUNCER: Welcome to another episode of Sync or Swim, brought to you by Rentsync. From operational challenges to marketing mastery, we uncover the strategies in technologies and all things PropTech. So, let’s dive in as we explore the trends, tactics and insights that define the future of multi-family investments. Sync or Swim starts now.

[INTERVIEW]

[0:00:42.5] GL: Well, hello everyone, my name is Giacomo Ladas, and I’m the associate director of communications here at Rentals.ca, and today, I’m thrilled to be joined by Tu Nguyen, economist at RSM Canada, and the leading voice on how global economics intersect with everyday life. From Tariffs and affordability to recession risks, price-to-rent ratios and the latest on interest rates, Tu is very well-known at helping Canadians connect the dots between policy and real-world impact. 

She’s a LinkedIn star, and we’re really thankful that you had some time to join us today. So, thank you, Tu, I appreciate it.

[0:01:11.1] TN: Thank you for having me.

[0:01:12.1] GL: So, at the time of this recording, which is, April 3rd, we are less than 24 hours away from the tariff announcement. So, let’s get into it, how do you see these recent USA tariffs affect the cost of the housing development and ultimately, I guess, rental prices and home prices as well?

[0:01:29.6] TN: So, to put into context, yesterday, which is April 2nd, the US came out with a sweeping round of tariffs on pretty much every country in the world, not just Canada. Interestingly enough, Canada was left off the chart, meaning that tariffs on Canadian goods will be staying fairly relative to the same to what it was before. So – but nonetheless, it doesn’t mean that Canada is out of the woods. 

What it means for construction and the housing market is that tariffs bring prices of everything, and that includes prices of construction materials. Now, this includes things like from lumber, to steel, to paint, you name it, appliances if you're talking about finishings. So, we can expect construction prices to go up fairly relatively quickly in the upcoming months, which makes it harder to do projects and makes it less affordable to buy for prospective buyers. 

So, there will also be supply chain disruptions. So, there’s a lot happening, and this is not limited to the housing market but for the general economy as a whole, as well.

[0:02:38.9] GL: Yeah, there’s been a lot of talks. I think the auto sector is the big one that’s getting a lot of conversation right now, and am I correct in believing that these tariffs will really come into effect after a lot of the inventory of the current stock of cars and whatever the goods and services is sold off? So, is this something that you think is going to affect us almost right away or is it a little bit down the road when actually all this inventory that they have of Canadian goods is sold off at the price that it was bought for?

[0:03:06.1] TN: So, the impact is going to have – it’s going to depend on which industry and which sector, right? So, right before March, we did see a wave of businesses, especially in the US and some in Canada as well, stocking up on inventory. We saw a lot of export for you had to go into the US as companies were anticipating tariffs, so they were buying a lot of inventory at pre-tariff prices. 

So, I think for a lot of businesses, they do have a little bit of a runway. Of course, if we’re talking about perishable or groceries items, consumers are going to see prices go up right away. With things like auto manufacturing, appliances, construction materials, it could take a little bit longer, but eventually, businesses will have to pass on the cost to consumers, that is what happens, I think in almost every case when there’s a broad-based tariffs. 
Even the ones that are much-much less severe than this time. So yeah, people might have a couple of months waiting time before we see the price, meaning before they go up.

[0:04:12.9] GL: Yeah, I’m just trying to find some positive side to this side right now. So, you know we have a little bit of leeway, but it does sound like we have been taking stock of it, building up inventory when possible, so.

[0:04:23.0] TN: Well, you know, I do have a little bit of a positive. I think the absence of Canada in yesterday’s announcement was a consolation prize if you can name it because other countries around the world are getting a broad-based tariff anywhere from 10% to 49%, whereas, in Canada, we do have goods that are covered under [00:04:44 Christmas], Canada, US, Mexico trade agreement that are not currently subject to tariffs. 

We’ve had 10% in energy and potash, 25% of steel, aluminum and 25% in autos. So, the effective tariffs rate is quite low and on par with global – with most countries in the world right now.

[0:05:04.4] GL: Well, hey, look at us make a positive spin out of all of this, that’s the whole point of it. Do you see any policy or even market shifts that could maybe help mitigate these effects even just a little bit, you know, something that we can do on a policy side of things?

[0:05:18.9] TN: Yeah. So, the Canadian government has been, I think, fairly targeted in terms of their response. So, a lot of retaliation measures are designed to minimize the pain on Canadian households and businesses. For example, in March, Canada rolled out some retaliatory measures, most of them were tariffs on goods from the US, but also goods where there are substitutes, either domestic or from other countries. 

So, that allows for Canadian consumers and businesses to switch to suppliers, either within the country or from other countries where that might become cheaper now. So, the other thing that I think really had failed to see is the rise in the Buy Canadian movement. So, we are seeing a willingness of Canadians to step up and choose Canadian products, which it’s to support their local economies and strengthen the Canadian economy, but this also makes sense in a time where there’s so much uncertainty to end global volatility. 
So, now policies on the policy sense, our policy is to try to encourage trade within Canada, so interprovincial trade barriers are being removed, all of them might be a bit more by July first, which is really incredible because a lot of these barriers have been in place for decades, and that I think this is an incredible window of opportunity, where provinces are willing to have conversations and walk together to make sure that Canadian businesses are able to trade and to grow.

[0:06:54.8] GL: It’s been oddly unifying, hasn’t it from amongst Canadians, right? I don’t want to get too-too-too political, but I do find that there has been a – I don’t want to say, Canadian pride has lowered, but it seems that this has really been a way to kind of unify us as a country to support one another. So, I guess, that is a good side of it too, right? We’ve really kind of come together in the face of this. 

And hopefully, that’s going to continue down the road by supporting Canadian products, by removing these interprovincial trade barriers, which I don’t even understand why they were there, to begin with in the first place, but I’m just glad that they could be moved down so fast, and as you know, we’re Rentals.ca, and a lot of stuff that we circle around is the rental and housing market. 

I have a lot of opinions on this but I’d love to kind of bounce them off you. So, how do you see a potential downturn, say, of the economy or the impact of tariffs really impact the rental and housing markets, specifically? I look to see if we kind of line up with our thoughts.

[0:07:49.8] TN: Yes, so, of course, all these tariffs, there’s a saying common among economists that there are no winners in a trade war and this is going to have a knock-on effect on not just Canada but the global economy as well, and in fact, with all the tariffs measures that came out yesterday, we’re expecting that there could be a global recession, and Canada is also expected to enter recession this year. 

We’re putting that the probability of Canada entering a recession in 2025 at 40% right now, it might be higher, it might be lower depending on what ends up happening and if that additional tariffs if some of it end up getting removed, et cetera, et cetera. So, what happens then to the housing market and rental prices? It’s interesting because it’s unclear exactly what happens to rent. 

Typically, in a recession, households, incomes, either are lower or they don’t increase as much, which it makes it difficult for household and for Canadians to afford housing, so that should keep rental prices from rising too much. At the same time though, in a recession or in an economic downturn, people tend to not buy and stay renting instead because they worry that they might lose their jobs, they might have a job that pay lower and whatnot.

So, that drives up rental demand and increases prices. We don’t know in the end what the result will be. I think the other piece of the puzzle, which we haven’t talked about but is very important is that Canada is also expecting a lot less immigration this year compared to previous two or three years, and that also keeps demand kind of low for renting. So, I think we can expect rental prices to kind of – stay kind of moderate in the upcoming months and not to skyrocket any time soon.

[0:09:45.9] GL: Oh, that’s a great answer, and – because I, when I get asked this throughout, you know, my media appearances, I kind of give an answer without giving an answer in a way because there’s so much up in the air. If we get into a recession, in theory, there will be people who have less money, and potentially, they will not be able to pay their rent, and they would have to move out or move back home, which would create more supply. 

But on the flip side, it would probably mean that there’s less development happening to build new supply as well. So, I don’t know if that evens out, I’m not sure what is higher than the other or the strength of each, but those are kind of the two larger broad-win, ones that I’ve been referring to. I’m not actually sure what’s going to be the most impactful, but we know the supply and demand dynamics are huge. 

You mentioned that the rate of immigration is expected to keep lowering or stay at this level. So, that will bring demand down, but also bring the amount of new supply coming down too, correct?

[0:10:40.2] TN: Yes. So, the supply is – it’s another question, right? Construction prices are too high, and if people are not willing to put down money on pre-construction projects, would developers still be willing to build?

[0:10:53.2] GL: That is the question.

[0:10:53.9] TN: Yeah, we’ve seen construction activities sort of levelling up last year, they did tick up a little bit this year, I think thanks to the lower interest rate. So, there are just a lot of moving pieces to this puzzle, complicated by global volatilities, less uncertainty going on, immigration dynamics. So, yeah, it’s hard to say, and I think it’s going to vary from market to market.

[0:11:17.8] GL: That flows well to my next question because I was interested in hearing the relationship between those price-to-rent ratios and interest rates, which are also in the news a lot. So, maybe you explain a little bit between that relationship specifically?

[0:11:30.8] TN: Yeah. So, the price-to-rent ratio is hugely, I guess, a quick way for people to decide whether they should go out and buy a property or just stay renting. So, obviously, if the purchase prices of a house is way too high compared to rent, then it’s more beneficial for most people to stay renting and vice versa. Now, what we are seeing, and we’re expecting to continue is lowering interest rates. 

Interest rate in the past two years were quite high, and that was to combat inflation. It’s been going down and when interest rates are lower, that means that households can be qualified for a larger mortgage, which drives up demand for housing, so for people to buy housing because now they can actually get a mortgage. So, that should drive up home prices, again, like we’re just taking one thing at a time and leaving out a piece of possible downturn or recession.

So, that drives up the prices of housing, right? Of buying, and then in the long run, lower interest rates also enable more construction as developers can borrow and build because that also acts as a supply and good at keeping prices, I think, from not going up too high, especially rental prices because a lot of these purpose-built rentals, which are something relatively new in Canada. 
So, once interest rates are low, it allows developers to go and build these projects as well but I think it really depends between market to market. Generally speaking, low interest rates means high housing prices, higher price-to-rent ratio, and vice versa.

[0:13:09.1] GL: Yeah, that’s interesting because there is such a connection between the rental market and the homeownership market, right? We often think that it’s very severed, but there’s really so much overlap where, you know, people move out of their apartments typically graduate homeownership, now there’s more supply. Of course, more supply is good, so that’s where I want to kind of ask you a little bit more. 

You know as interest rates rise or fall, what tends to happen in the rental market that’s comparative to homeownership? You know, we kind of touched on a little bit, but we are in a supply and demand crisis right now. So, are we looking at it just as when rates go down, people move out, they buy a home and more supply, or is there anything else that tends to happen? 

[0:13:49.5] TN: Yes, I think the short answer is yes, when interest rates fall, people move from the rental to the home because they can now get a mortgage, right? So, that is typically what happens. Some more people buying means the rental demand is lower, keeping everything else constant, especially if immigration stays low, so that should either drive down rent prices in certain cities or keep rents relatively stable. 

Now, the other piece is Office in the way immigration is. Again, we don’t know what the cumulative impact of everything would be. I think that’s the simplest and shortest answer of what happens when interest rates lower, and right now we have had inflation being quite low for quite some time. We’ve got a lot of trade uncertainty going on, so we should expect interest rate to stay low throughout this year. 

[0:14:40.9] GL: And I think you had a really good perspective because you are tracking the differences in markets across the country, right? And there is obviously a ton of differences wherever you go, but are we currently at a point, this could be a national conversation or it could be broken out to more provincial or city wise, but are we at a point now where renting kind of makes more sense financially than buying? 

We have these charts internally all the time and we try to produce content that you know, as Rentals.ca, we want to cut or remove the stigma of renting because it seems to be a real – I don’t know if it’s a North American thing, but renting almost seems like a lesser form than homeownership, but there is a lot of good and bad for both. So, are we at a tipping point right now where you think renting makes more financial sense than buying or is this the time now to actually get into the housing market? 

[0:15:27.2] TN: You know again, it really depends, and for those who are renting and looking to buy, I think really the things you do was to plug, gather all your numbers, and plug them in the calculator there are tons of rent or buy, rent versus buy calculators online that you can find. The answer is going to vary but I think in Canada, in a lot of major cities, the math strongly favours renting, and it’s been this way for quite some time now. 

There is a saying, another saying in real estate, which I’m sure you’ve heard a lot is that rent is the most you are going to pay every month and the mortgage is the least you are paying every month. There are a ton of costs associated with homeownership, right? So, that’s from the transaction cost, you got to pay your realtor, your lawyer, your taxes, there’s maintenance, something could break, and you have to be able and willing to pay for that, fixing that thing. 

If you are in a condo there are condo fees, which go up over time, and then there’s utilities, which are most of the time higher in when you buy a place compared to when you’re renting, and then property taxes and on and on and on. So, that – so when someone is considering buying, it’s important to plug all this number in your spreadsheet, in your calculator, whichever tool you’re using instead of just comparing rent and the mortgage, and then there’s also the opportunity costs of owning, right? 

There’s – it could be if you’re living in a major city in Canada like Toronto and Vancouver, your down payment could be several hundred thousand dollars, which if you were to rent, you could put that in the market, invest it somewhere else, and then the cost, there’s this invisible cost of not being able to move. Say you get a new job somewhere else or if you want to move for family reasons, the cost of moving when you’re buying is so much higher. 

So, there’s all of these things to take into account, and yeah, I think increasingly, it seems like in a lot of Canadian cities, certainly in Toronto and Vancouver, maybe Calgary, Calgary was quite affordable. It’s getting less and less so in the past few years. It’s more favourable to rent in a lot of places. 

[0:17:44.2] GL: You know, I’ve always kind of grown-up thinking and hearing that 30% of your income should go towards your housing cost, right? But it seems even renting as opposed to homeownership, that’s not the case either anymore. It’s as you mentioned, plug everything to your spreadsheet, really take a look at it all because 30% may not actually be the rule anymore that is what’s acceptable for housing because as you mentioned, there’s a lot of hidden costs. 

So, at least if you rent, it’s a more fixed fee, you know what it’s going to be every month so that you can kind of calculate that 30, 35, 40%, whatever you’re comfortable with. So, I think that sense of stability is also a huge part of renting and why it’s so favourable for people but yeah, I don’t know if you’ve heard the 30% rule should go towards your housing, but it’s quite hard when you see the prices of rent in a home right now, especially in some major cities. 

[0:18:30.3] TN: Yeah, I think it’s hard because and yes, I’ve heard that 30% I think is really difficult for young people especially, who are just entering the market or enter the market for this past three, four, five years, just stages at row or income. Canadian incomes have not kept up with housing prices at all. So, it’s a nice guideline.

[0:18:51.7] GL: It’s a cute guideline. It’s cute, hey? I think I – 

[0:18:54.7] TN: It’s not always feasible and that’s really unfortunate. 

[0:18:58.1] GL: So, as we’re in the middle of the election right now, you know we’ve heard a lot of promises and policy changes that not every party is looking to do. A lot of them is those income tax cuts being proposed, some obviously by the liberals and the conservative parties. So, do you see that having an impact on the rental and housing market, and maybe on top of that, have you heard any other policies that have been proposed by either party that you could see, maybe impacting the housing market in general?

[0:19:23.8] TN: Yeah. So, we’ve seen quite a few things through now done by different parties and yes, you are right that we are coming up on an election this month, actually. You can even actually vote right now.

[0:19:34.0] GL: Oh, there we go. Get out and vote, everyone.

[0:19:37.2] TN: So, we’ve seen promises regarding removing GST for first-time home buyers, that, in my opinion, is not going to have a big impact. It’s used a lot in policies because I think it feels nice to hear for households, but what it does is that it only helps the people who are right on the verge of buying. If someone is almost able to afford a place, the removal of the GST is going to push them over the edge. 

And so, that benefits a small amount of people, a small number of people. What it does, however, is also driving up prices and demand for housing because now, more people are able to buy and more people are suddenly in the market and in the long run, it does not really have affordability. It’s just akin to like giving people cash. What I think is really going to make a difference is aiding supply, by whichever means possible. 

So, what I’ve seen is the liberal government put out an initiative where they are creating a federal agency called, Build Canada Homes, and they promised to build half a million units of housing over the next few years, and adding a lot of supply to the market is going to have affordability and crisis of housing and rental because the thing is in Canada, we’ve – we have over 40 million people now. 

And our population has been going up, and up, and up and the pace of construction, of building homes has not kept up with that at all. So, we really need to add more supply if we want to bring – to keep prices affordable, whether it’s to buy or to rent for Canadians. Now, other things can also be done to have with affordability, to have, add more supply. That can be removing red tapes, making it easier for construction projects to get approved, and that’s worked for single-family or condos or for purpose-built rental. 

It’s taking way too long and it costs way too much in most Canadian cities to get a project approved, and when we look, when we zoom out and look at the global picture, places where it’s really easy to build have much lower housing prices because it’s just easier to add supply. Now, that is Phoenix Arizona, that’s huge in Texas, and places where it’s really difficult to build, you know that’s Toronto, and Vancouver, San Francisco. 

Those are places where housing prices just skyrocket. So, I think, anything that the government can do to have and add supply to the market, whether it’s by building it themselves or to have it – make it easier for developers to build, that’s going to make the biggest difference. 

[0:22:19.5] GL: Yeah, that’s really interesting because – so, GST might not actually be the one-stop shop to helping this but supply in any way manageable still is the key because we’re still so undersupplied, and I think some of our listeners maybe don’t understand just how undersupplied the market is right now. I work with Urbanation to do our Rentals.ca rent report, and they track a lot of the new starts and they said that a new condo development takes a hundred months from application to completion in Toronto. 

So, I don’t know if people also realize how long this takes, right? We see a lot when we release our rent reports, and a lot of the rents are high. You know, renters see developers and landlords not as the enemy, but getting in their way of renting an apartment, but I think educating and understanding how much red tape they have to go through, the cost for development right now, and how long it takes. 

You know, I think we’re all kind of in this together and I think removing moving those barriers, speeding up the processes, and letting developers do the thing they do the best, which is build homes quick is the way we get out of this because as you mentioned, we are still really under-supplied, and we have been under developing personal rentals, specifically for decades if I’m correct, and a lot of these cities, like Toronto and Vancouver, where there’s not much land to actually expand out. 

You know, you mentioned Calgary, I have more hope for Calgary because just – they can keep building. Toronto and Vancouver, they have so many, there’s the ocean, there’s mountains, there’s not a lot of space, Toronto is an old city. There’s so many factors in these areas where we really got to speed up and come up with innovative ways because you know, I’m sure you’ve seen in Vancouver specifically what’s happening in that housing market. 
The barrier of entry seems almost impossible for younger people, especially a single person who doesn’t have two incomes getting into that household.

[0:24:00.6] TN: Yeah. So, I think in Canada, I think one example that is a good example is at Edmonton where it’s – they can keep building and it’s – I think it’s the easiest city, mid to large city in Canada to build. The thing in Edmonton, if I remember correctly, the time to get approval is something like two months whereas, in Toronto and Vancouver, it’s over a year, maybe closer to two years in some cases. 

So, in real estate, in construction and housing, time is money, right? Because interest rate, when you borrow money, you’re just – every minute that you are not building, you’re wasting time, you’re wasting money, and you’re not adding supply. So, I think if anything, we could follow the example of Edmonton, which is a Canadian city that has managed to keep housing prices relatively affordable, compared to the rest of Canada.

[0:24:51.9] GL: Absolutely. We’re seeing out of the rental rates as well. In Alberta, it’s funny because everyone in Alberta was calling and they had a ton of people come to that province, and we saw a little rental and housing prices increase, and I don’t think Alberta is calling as much anymore until they get the supply it, but that province does a really good job at adding more supplies, compared to other provinces. 

So, yeah, it will be interesting to see and I’m sure you’ll be discussing it. If you guys don’t follow Tu on LinkedIn, we will link her information in the show notes because we do encourage it. She has terrific videos, great clips too. You know, the minute, a minute and a half clips that are easy to digest I think are really great. We’ve noticed it, I’m sure our audience will as well. So, we really thank you. Like, thank you for your time and I hope we can talk again, maybe with more positive notes. 

[END OF INTERVIEW]

[0:25:34.3] GL: I want to thank all our listeners for their continued support, and if you want more insights on the Canadian rental market, check out our blog and the monthly rental reports at Rentals.ca, or follow us on YouTube or wherever you get your podcasts. Until next time.
[0:25:48.4] ANNOUNCER: Thank you for tuning in to another episode of Sync or Swim, brought to you by Rentsync. If you enjoyed today’s show, make sure to visit www.rentsync.com/podcast, for detailed show notes, key takeaways, and more. Thanks for listening. 

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