What happens if they actually raise rates?

The Bank of Canada’s language on rates has tightened dramatically in the last several months. It was not long ago that BOC Governor Maklem was saying that rates would stay ultra low for many years to come – this to support the economy that was battered by COVID-19. His language has changed since re-opening has intensified and since economic activity and inflation have picked up. Now we’re hearing that rates will likely go up in 2022, and we’re all aware of the inflation figures which are close to 4%. The language from the Federal Reserve is even more hawkish, suggesting a hike could come soon given unprecedented U.S. spending and money printing and inflation – albeit tapered with plenty of talk of stimulus, bond buying, REPO market support, etc. Will the BOC raise its rates early, or earlier than the Fed? That’s a big question.

The BOC is increasingly pointing to rate hikes in the second half of 2022, and the Fed, while adamant that rates will only go up in 2023, has few in the market fully convinced, especially if high inflation numbers hold. More and more U.S. banks are releasing reports and warning their clients that the ‘transitory’ nature of inflation is under-reporting the reality of the situation. In other words, it won’t be a blip, but it’ll stay with us longer than we’re being told. In an interview with the Financial Post, CIBC Deputy Chief Economic Benjamin Tal suggested that the BOC and Fed would coordinate a joint rate hike in the second half of 2022, especially if inflation pressures keep up. Tal also made the point that the Canadian government is more vulnerable to a rate hike than the U.S. government, and that private debt in Canada has continued to grow in the last several years even as U.S. consumers slightly paid down their credit cards.

Another striking point made by Tal was that the effect of a rate hike would be more pronounced in Canada today than it would be in the past, given our greater dependence on debt: “Our estimate is that a 1% increase in rates today would be equivalent to a 2% increase ten years ago, so the effectiveness of monetary policy is crucial.” Tal’s worry is that the BOC waits too long to raise rates, or increases them too quickly, suggesting that such a move would be very risky for the market, the economy, and government finances. On a positive note, Tal is bullish on the second half of 2021, agreeing that the economy will see strong growth (some 6%) because of increased consumption and a post-lockdown boom.

Inflation has finally arrived to Canada’s shores

For the last decade Canada has enjoyed inflation that never rose over 3%, hitting the Bank of Canada’s target. There were times when inflation was so low and unalarming that economists and public figures called for massive government spending and even interest rates to stimulate economic growth and employment gains. Now, because of the financial and economic aftershocks of COVID-19, the party is over given the arrival of the latest inflation stats. May saw inflation hit 3.6%, the highest rate in a decade. This is notable because it shows that Canadian inflation is almost as high as the U.S. (3.8%), where multi-trillions have been printed and spent by governing bodies in the wake of COVID-19.

Not since the early to mid 1990s has Canadian inflation approached 4%. This inflation is the result of low interest rates and huge increases in government spending across the board, coupled with supply shortages and labour disruptions. Housing and rental costs increased by 4.2% in May, furniture and appliance costs rose almost 4.5%, and gas prices have surged by over 43% from May 2019 figures. Car prices are going up, health care prices are rising, and some food items are getting more expensive – especially meat. The overall 3.6% inflation was not unexpected, economists expected a 3.5% increase, and Tembo has been writing about the potential for higher inflation and its importance to the real estate market for years.

The big question now is will this inflation remain, will it get worse, or will it begin to dissipate? All eyes are on this. If inflation sustains itself rates will have to go up. Economists are all saying that this inflation is transitory, that it’s a temporary offshoot of COVID, and that it’s a natural bounce from the low point where prices fell in the immediate aftermath of COVID. We’re already seeing that the ‘lumber bubble’ has apparently popped, and that lumber prices will now begin to fall from serious highs – so that could back up the ‘transitory’ argument. But with restrictions lifting, and people eager to consume and spend money, demand for goods and services will only grow. There’s unpredictability out there, but let’s all hope that inflation will go away.

Canada’s Population and Housing Needs Are Soaring

Canada’s 2011 census saw the population tick in at just under 33.5 million, a 6% increase from the 2006 census of 31.6 million. By 2016, the national population had risen to over 35 million people, and Statscan estimates that over 38 million live in Canada as of this year. In just a decade, over 4.5 million more people live in this country, and that has placed huge pressures on housing, employment, and our environment. That’s the net equivalent of adding the population of Toronto, Mississauga, and Brampton to the country. Long term estimates project 46.5 million people living in this country in 20 years. Immigration will continue to increase throughout the 21st century. The bulk of immigrants settle in three regions, already plagued with serious housing supply issues (the GTA, Greater Vancouver, and the Greater Montreal area).

How will we house the many millions that have arrived and that have ambitious housing aspirations, let alone the millions more that are coming? Experts are calling for ambitious, broad public policy measures. The dependence on urban sprawl, and building vast suburban lots of detached housing can’t continue forever. Accessible land is in short supply, and is extremely expensive. Canadian society is far too decentralized, individualistic, and suburban to fully embrace the kind of densification that has been the norm in many societies around the world where populations are large and where land is limited – Hong Kong, Tokyo, London, Manhattan. Experts, however, believe that intensification, redevelopment, and densification are the only ways enough ‘affordable’ housing stock can be brought onto the market to meet growing demand.

If immigration continues to surge, and the Trudeau Government is banking on it to, a detached home will become a luxury with average prices hitting well over $1 million in more and more parts of the country. While Canada is an enormous country, only 4% of its surface area is arable, and 90% of the rapidly growing population lives within a very narrow belt of this land adjacent to the U.S. border. It is estimated that every day, Ontario loses 175 acres of land to development. Population density in southern Ontario is rapidly increasing, and some believe that unless densification proceeds effectively and rapidly, we will have to build homes on protected and designated land to meet demand and consumer choices.

Historic News for GTA Public Transit Will Spur Densification and Higher Home Values

The Federal government has finally taken a strategic leadership role in the construction of public transit in the GTA. Several weeks ago, Ottawa announced that it would cut a cheque for over $12 billion on key strategic transit projects in the GTA. This is the first time in living memory that Ottawa has contributed significant funding (we’re talking about multi billions) to a broad number of public transit projects in the GTA.

In Toronto over $10.4 billion will be allocated to the Ontario Line, the Scarborough Rapid Transit replacement, the Eglinton Crosstown LRT and the Yonge-North subway extension. This funding will cover about 40 percent of each project and guarantees construction will start soon and that provincial and municipal bodies will fully commit themselves to accelerate work. In Hamilton, almost $2 billion in federal money will go toward building the long debated LRT in the downtown core. The federal funding puts to a complete end the debate over an LRT or BRT in Hamilton, which had raged for over a decade. The Hamilton LRT will spur an increase in density and a more cohesive and communal downtown core which is dominated by bus and car traffic.

None of these transit lines will be done soon, tunnelling hasn’t even begun, and given how slow we are at actually building transit, it’s likely these projects will take 10 years to get done. Governments are using 2029 as the completion date for all of the Toronto transit projects. Either way, the projects in Toronto encompass and back up Premier Doug Ford’s GTA transit expansion plan, including the province’s bold Ontario Line, which is said to be the largest subway expansion in Canadian history, as well as the Eglinton Crosstown West LRT, and the Scarborough and Yonge North subway extensions. The Ontario PCs have estimated the cost of those projects at $28.5 billion.

Property tax rates in the era of COVID-19

Torontonians continue to pay some of the lowest proportional property tax rates in Ontario, despite an above inflation increase that was passed by City Council earlier this year. Today Torontonians pay 0.6% of their home values in property taxes compared to 1.77% in Windsor, the highest in the province, and 1.5% in Thunder Bay. The average property tax bill in Toronto ranges from $3,000 – $5,000 a year, depending on home values. $740 of that bill goes to fund Toronto’s $1.1B a year police force, $540 goes to fund the TTC, and $400 goes to pay for long term capital projects. The GTA generally has much lower property taxes than rural and outlying regions of the province. 

We will see how COVID will affect these rates, given that Toronto is now looking at at least a $1.5B financial shortfall from the impact of the pandemic. The worst case financial hit to Toronto could be nearly $3B. The City has a GDP, or economic output of $250B, so it has the economic base to support going into debt to manage the difficulties of COVID. However, due to provincial rules and laws, the city has considerable limits on how much it can borrow. Those rules could be changed or loosened up for the city in lieu of a provincial bailout – which not only would be extremely expensive but would be looked upon with anger by other cities who are also facing serious financial and economic problems. One bailout to one city will lead to other cities asking for the same. Toronto has been leaning on debt and green bonds to patch up the city’s huge infrastructure, transit, and capital repairs backlogs that total many billions of dollars. This dependence on debt and debt servicing will only grow. 

Toronto’s growing tech. and financial sectors have helped the city enjoy significant prosperity (and high housing costs) prior to COVID, and will be counted on to support recovery from the pandemic. The city’s politicians have pointed to the strength of these sectors are reasons to bailout the city – claiming that its economy is interconnected to the rest of the country and a key driver of revenue for provincial and federal governments. Mayor Tory has repeatedly spelled out that deep cuts to services will have to go ahead if the City does not receive a bailout (firing police officers, gutting bus routes, and cutting down road funding – but not lowering the high salaries of senior bureaucrats or reducing the city’s 55,000 bureaucrat payroll through attrition). 

On solving Toronto’s housing shortage

The Federation of Rental Housing Providers of Ontario (FRPO) recently released a report discussing the shortage of affordable housing in Toronto and presenting a solution. The magic ingredient to solving the housing crunch can be found in ‘infill’ land, low density or undeveloped space in and around public transit and transportation nodes across the city. The ‘infill’ land is near subway stations, GO stops, and major highway interchanges. Outside of the downtown core, infill land is generally low rise, although there is some mid rise construction at these sites also. 

The FRPO estimates that 176,000 new units of housing could be added to Toronto’s rental market at over 950 sites across the city. Many of those units would be within walking distance of subway and transit sites. The key to these infill locations is that they are already zoned, purchased, and ready to be developed – the question is can the density be built up at enough of them? One of the major policy solutions the Ford Government has committed to in addressing housing concerns has been to increase density at GO station and public transit locations. This mirrors the proposal of the FRPO. The province sees this as a win win for developers, prospective home-owners, and governments. Developers make a profit, home owners get more housing buy opportunities, and governments get higher tax revenues. 

Embarking on an aggressive development campaign on infill land would be one way to alleviate the historically low levels of development we’re seeing in Ontario lately. If one were to measure the number of housing completions per 1,000 people, today output is at 4. This matches historic low points in the early 1990s in the aftermath of the 80s real estate bubble popping, the late 70s recession, and the 1953 recession. Throughout the economic boom of the late 50s and 60s, housing completions rose from 6 to 11 homes built per 1,000 people. Our low rate of housing construction has been in place for the last 12 years. We need to build more housing, period.

COVID-19 supports for individuals

In this blog, Tembo will outline some of the programs and measures in place to support individuals for those in need. We recognize that many of our readers, clients, and stakeholders are people who have been directly impacted by COVID-19 or have had family or friends who have. Governments have implemented many policies to help people manage the difficulties of the pandemic.

  • Through Ontario low-income tax credit, benefiting 1.1 million Ontarians by providing relief of up to $850 a year.
  • Through Ontario child care tax credit, that provides 300,000 Ontario families an average of $1,250 per year in tax relief, letting parents choose the best child care of $1,250 per year options for their family.
  • A $1 billion commitment to create 30,000 new child care spaces.
  • $275 a year for a family for items like fuel and other basic necessities by cancelling the cap-and-trade carbon tax.
  • For Northerners, the aviation fuel tax was lowered, saving money for individuals and families on groceries and travel costs.
  • Aviation fuel tax rate in the North was lowered to 2.7 cents per litre from 6.7 cents per litre.
    • This returns the aviation fuel tax rate in the North to the level that was in effect in 2014.
  • Kids can now ride free on GO trains and buses.
  • 100,000 low-income seniors will have access to publicly funded dental care.
  • Tuition fees were cut by 10 per cent last year and froze tuition next year to help keep more money in the pockets of Ontario students.


  • LIFT – Minimum wage earners pay no Ontario personal income tax and provide relief to over 1.1 million low-income Ontarians.
  • Child Care Tax Credit – Provide relief for 300,000 families with a tax break of $1,250 on their child care expenses per year, on average.
  • Free GO rides for kids under 12.
  • Reducing tuition fees by 10% for students.
  • Free dental care for 100,000 low-income seniors.
  • Supporting seniors and their families with the Estate Administration Tax cut for all taxable estates.
  • Scrapping the cap-and-trade carbon tax.
  • Lowering electricity rates by cancelling over 750 renewable energy contracts, saving ratepayers $790 million.
  • Freezing driver and vehicle fees.
  • Scrapping Drive Clean.
  • Free fishing on long weekends. Free fishing for veterans and active service members.
  • Improve housing affordability by making it easier to build more homes faster, protect renters, and increase the mix of housing to make more options available. 

COVID-19 supports for small businesses

In this blog, Tembo will outline some of the programs and measures in place to support small businesses for those in need. We recognize that many of our readers, clients, and stakeholders are small business owners, have entrepreneurial family or friends, or are just interested in what governments have done to support our businesses get through the pandemic.


  • Up to $196.10 in EI premium reduction for short-term disability benefits per employee per year through the EI Premium Reduction Program.
  • Up to 65% of eligible expenses through the CERS (Canada Emergency Rent Subsidy), open until December 19, 2020.
  • Cost-recovery basis PPE for sale through the national Essential Services Contingency Reserve if you can’t acquire PPE through other means.
  • Contact your Regional Development Agency for a review of your situation and potential supports.
  • Waiving of tariffs on any imported PPE or medical items a business procured after May 5th.


  • Up to $100,000 in business loans through the BDC Small Business Loan with 5 day approval, apply online with the BDC.
  • Up to $40,000 in interest free loans through the Canada Emergency Business Account (CEBA), applications close on Dec. 31, 2020. 
  • Up to $6.25 million in cash flow term loans through the EDC Loan Guarantee program (BCAP), applications close on Jun. 1, 2021, apply through your bank.
  • From $1-$12.5 million in cash flow term loans through the BDC, apply through your bank.


  • Up to $5,000 through the Canada United Small Business Relief Fund to buy PPE, renovate your business space, or boost e-commerce capabilities.
  • $1,000 Main Street grant to buy PPE
  • $2,500 Digital Main Street Grant to help build a website and enhance e-commerce activities for businesses without one

Tax Credits & Levies

  • Through the Small Business Tax Credit, tax rates for companies with revenues less than $500,000 are reduced
  • Up to $9,945 through higher Employer Health Tax exemptions when you file your taxes if you qualify.
  • Up to $3,000 or a refundable tax credit of 30% through the Co-Operative Education Tax Credit if a co-op student is hired.
  • Up to $2,000 per year for each apprentice hired through the Apprenticeship Job Creation Tax Credit.

Contact your local MP or MPP for more details on help in applying and accessing these supports. Keep in mind that most of the loans outlined in this blog post are in the hands of the BDC and EDC (Business Development Canada and Export Development Canada banks). 

The Bank of Canada guarantees low rates until 2023

The message now set in stone was reiterated recently, loud and clear: cheap money is here to stay. For at least the next 2 years, the Bank of Canada will keep its record low interest rates steady at 0.25% or until we hit 2% inflation. Bank of Canada Governor Tiff Macklem was unambiguous: “Our main message today is that it will take quite some time for the economy to fully recover from the Covid-19 pandemic, the Bank of Canada will keep providing monetary stimulus to support the economy through the recovery.” The Bank also made the bold but widely held statement that economic growth will hit 4% on average in 2021 and 2022. As inflation continues to fall below the Bank’s 2% target, it sees no issue from an inflationary perspective in keeping rates this low, and it sees the low rates as being crucial to supporting long term economic recovery, loose fiscal policy, and a stable housing market in the months and years to come. 

The big winner from the clear and definitive announcement will be fixed 5 year mortgages, whose rates will now fall because of the long term certainty the Bank’s announcement provides. Homeowners with floating rate mortgages won’t see much benefit from the reduction as rates are already effectively as low as they can possibly go. The only alternative is for the Central Bank to pursue negative rates (where it would pay you to borrow from it). Surveys show that most new prospective homebuyers say they will opt for 5 year fixed rate mortgages given their growing attraction and certainty. According to ratehub.ca, Meridian Credit Union is offering a fixed rate 5 year mortgage at 1.60%. TD Bank is offering 1.94%, the lowest of the big five banks. RBC’s 2.22% fixed rate five year mortgage is the highest. 

To put those figures in perspective, a $550,000 home mortgage with a 20% down payment would cost the average home buyer $1,800 a month to service. This is considerably less than the average base rent costs in Toronto. (We’re not including property taxes, utilities, insurance, etc.), but the low nature of these rates is incredible. If housing cost what averages were in1990s ($300K), a monthly mortgage would cost $1,000 to service with a 20% down payment. The BOC’s announcement will provide clear psychological and fiscal stimulus for the Canadian housing market for years to come. 

A surging September

They called it “the best September on record for Toronto home sales.” 42.3% more homes closed last month than was the case in September of 2019. Over 11,000 homes were sold, and the average sale price approached just under $1 million at $960K. Prices jumped 14% from September 2019 levels, and it’s safe to say that Toronto real estate has now comfortably exceeded any price and demand levels seen in the last craze several summers ago. Realtors exclaimed the blockbuster numbers on the ever lower mortgage rates, courtesy of a Bank of Canada that has signalled that rates will be this low for ‘years to come.’ Prime mortgages at TD are now trailing in the low 2% range, down from the already low 3.3% range seen pre-COVID.

Realtors also pointed to the fact that uncertainty and difficulties created by COVID-19 formed pent up demand. The weakness in the condo market was offset by the gold plated low rise and detached market. All of this occurred as polling in late September showing confidence among Canadians as being sky-high in the long term fundamentals of the market. Over 44% of Canadians polled expect real estate prices to rise over the next 6 months, COVID-19 complications notwithstanding. Those polled who expressed the opposite view fell to 27%, the lowest in many months. The pessimism of the impacts of COVID-19 on the real estate market is dead and buried – the exact opposite sentiment has been generated by the pandemic.

All of this largely fits into the longer term predictions by the commercial banks and the Bank of Canada. Predictions show that while prices and demand may rise in the final quarter of 2020, the big institutions expect next year to be a rough one – all largely because of uncertainty and the potential for crises arising. We’ll have to wait and see what 2021 holds. Mirroring what happened in Toronto, real estate dynamism was marked in Vancouver, where sales rose 56.2% in September. The numbers in BC’s Fraser Valley were even higher, at an astronomical 66.1% higher in September compared to a year earlier. The picture in Ottawa and Montreal was also very promising. The next few months should be good for southern Ontario real estate.