Long awaited by industry professionals, the federal Fall Economic Statement (FES) seems, on the surface, to have made a substantial commitment to tackle pressing issues of housing affordability. By digging a little deeper, however, this shiny envelope reveals a hollow shell.
The current landscape in Canada is marked by a sharp contrast between the Bank of Canada’s monetary policy and the federal government’s fiscal approach. The Bank, under Governor Tiff Macklem’s leadership, is aggressively combating high inflation through increased interest rates.
Recent remarks by the governor highlighted that they did not want a repeat of the 1970’s inflation and, while markets are starting to price in rate stabilization and even rate cut, the commitment of the governing council to avoid an entrenched inflation is still a monetary policy wildcard.
This necessary stabilization measure, translates into higher-for-longer borrowing costs, impacting the commercial real estate sector significantly. The increased financing costs hinder development and investment activities while indirectly affecting demand for commercial spaces through suppressed consumer spending and business expansion.
In contrast, the federal government’s fiscal policy, with its recent announcement of $20.8 billion in new policy actions focusing on housing affordability will take effect over the medium term. Most of these measures are set to commence in the second half of 2025-26, reflecting a gradual approach, but muting any solutions for the immediate pitfalls of the real estate market.
Further complicating this picture is the federal government’s current fiscal trajectory, which appears to diverge from the disciplined approach advocated by the Bank of Canada. Despite growing deficits and rising interest rates on debt, the government’s fiscal policy does not significantly curb spending, with program expenditures projected to outpace inflation projections in the coming years.
This approach, juxtaposed with the Bank’s efforts to control inflation, suggests a period of sustained inflationary pressures, adding another layer of complexity for commercial real estate stakeholders.
On one hand, the Bank’s focus on curbing inflation through higher interest rates directly impacts borrowing costs, potentially slowing down real estate investments and developments. On the other hand, the government’s expansive fiscal policy, without significant spending cuts, may contribute to prolonged inflationary pressures prolonging the fight against inflation and augmenting the need for further rate hikes.
The government’s approach emphasizes short-term economic growth due to increased spending, but at the cost of long-term financial stability. This could result in a cyclical pattern of economic booms and busts, which can be particularly challenging for the real estate market to navigate.
As we continue to monitor these developments at Votre Equipe Immobilier, we encourage our clients and partners to consider how these contrasting economic forces will shape their investment strategies.
How will your investment decisions adapt to this complex economic landscape? Are there opportunities within this uncertainty that align with your long-term real estate goals?
We invite you to engage with us for a deeper analysis and tailored advice on navigating these challenges and opportunities in the commercial real estate market. Together, we can formulate strategies that capitalize on the current economic climate while preparing for future market shifts.