Governments need to get housing booming again to fix their finances

Canada’s fiscal challenges across federal, provincial, and municipal levels underscore the urgent need for pro-housing policies to stimulate growth. The Bank of Canada’s shift toward lower interest rates and looser conditions, driven by a review of inflation measures, aims to ease pressures on shelter costs, potentially boosting housing starts. Toronto’s condo market cooldown with an 80% drop in new starts, has slashed development charge revenue from $732 million annually to a projected $118 million in 2025, threatening city infrastructure funding. Federally, a looming $100 billion deficit highlights the reliance on housing-driven revenue. Reviving housing construction through supportive policies is critical to stabilizing budgets and ensuring economic resilience across all government levels.

The Bank of Canada plans for lower rates and looser conditions

The Bank of Canada is contemplating a shift away from designating CPI-trim and CPI-median as its “preferred” measures of core inflation, as Deputy Governor Rhys Mendes announced during a speech at the Ivey Business School. With a monetary policy framework review slated for next year, Mendes questioned whether the bank should broaden or abandon its preferred measures, noting they are just part of a broader set of indicators used to meet the 2% inflation target. He highlighted that markets often overemphasize these measures, despite the bank’s recent focus on underlying inflation, a concept incorporating core measures and broader price pressures. In July and September, underlying inflation, estimated at 2.5%, diverged from core measures at around 3%, a half-point gap significant enough to influence rate decisions, like September’s 25-basis-point cut to 2.5%. Mendes explained that core measures like CPI-trim, which excludes extreme price changes, and CPI-median, which selects the middle price change, help filter out temporary volatility, but their reliability has wavered, notably during post-pandemic inflation surges. The bank dropped CPI-common in 2022 due to large revisions. Looking ahead, Mendes expects underlying inflation to ease as rental markets soften and input cost growth normalizes, cooling shelter and non-energy goods prices. The bank is also considering excluding mortgage interest costs from its measures and exploring alternative indicators. Mendes emphasized that interest rate changes take time to impact the economy, requiring the bank to avoid overreacting to monthly inflation fluctuations. This review signals a potential overhaul of how the Bank of Canada assesses inflation, aiming for a more flexible approach to ensure accurate policy decisions in a dynamic economic landscape.

Tembo’s Toronto City Budget crisis prediction has come true

We warned years ago that the City of Toronto’s fiscal dependence on development charges and land transfer taxes was unsustainable and would spark a fiscal crisis in the event of a housing slowdown. We were emphatic that the city repeatedly spent way too much money, raising spending unsustainably, overconfident and complacent that real estate taxes would go up forever. Now the crunch has arrived. Toronto’s condo market has cooled with an 80% drop in new condo starts this year compared to the five-year average, according to the Canada Mortgage and Housing Corporation. Only 2,086 units began construction by August, down from 9,960 last year and 16,350 in 2023, marking the lowest since at least 1998. This is not just a headache for developers but now a fiscal crisis for Toronto city hall, which has long relied on development charges to fund capital projects like water mains and transit infrastructure. From 2014-2017, these charges averaged $236 million annually, soaring to $732 million between 2018-2023 after rate hikes. However, 2025 projections show only $118 million, far below the $520 million expected, threatening major infrastructure plans. The city holds $2.9 billion in prior charges, but this buffer won’t last forever. The condo slowdown, coupled with reduced provincial and federal support, signals a grim financial outlook. Budget chief Shelley Carroll has hinted at austerity measures, emphasizing intentional spending and prioritizing affordability amid global uncertainty. This crisis challenges Mayor Olivia Chow and potential 2026 election rivals, like Coun. Brad Bradford and former mayor John Tory, to explain how they’ll fund promises without banking on a condo boom revival. The city’s reliance on development charges, meant to make growth pay for itself, has also subsidized existing infrastructure, raising fairness concerns as new condo buyers bear the cost. Prepare for poorer city services and even higher property tax rate increases – by a Mayor who has already increased them by over 25% cumulatively since being elected in 2023. 

$100 Billion Federal Deficit Likely

Prime Minister Mark Carney’s first federal budget, set for November 4, will mark a permanent shift to a fall budget cycle, as announced by senior government officials. This change aims to align budgetary items with the main estimates, the annual expenditure outline voted on in Parliament by March 1. Finance Minister François-Philippe Champagne emphasized that this adjustment will enhance predictability for organizations, businesses, and provincial budget planners, without requiring provinces to alter their schedules. The fall budget will replace the customary fall economic update, with a spring update taking its place. Historically, federal budgets have been presented in spring since 1981, except for a December 2001 budget under Jean Chrétien. The new schedule aligns with practices in countries like the U.K. and is expected to better coordinate with construction seasons and parliamentary oversight. The upcoming budget will include a comprehensive deficit figure, despite the Liberals’ new capital budgeting framework, which separates operational and capital spending for greater transparency. Champagne reiterated the government’s commitment to balancing the operational budget within three years, though questions remain about revenue allocation. Amid a U.S. trade dispute, Canada’s fiscal position remains strong, boasting the G7’s lowest debt-to-GDP and deficit-to-GDP ratios and a triple-A credit rating. However, the interim Parliamentary Budget Officer projects a $68.5 billion deficit for 2025-26, a $16.8 billion increase, potentially breaching the Trudeau-era fiscal anchor of a one percent deficit-to-GDP ratio. Reports from La Presse and the C.D. Howe Institute suggest the deficit could exceed $92 billion, possibly reaching $100 billion, challenging the Liberals’ campaign promise of a $62 billion deficit. Champagne avoided confirming specific figures but stressed investments in NATO commitments and national sovereignty, underscoring the need for generational investments in a changing global landscape.