Intelligent Investment
Real Estate Investment Market Faces Fresh Challenges
Canada Monthly Market Commentary
April 29, 2024 2 Minute Read
Most major economies continue to advance towards their first interest rate cuts this cycle in or around June, with the notable exception of the U.S. where market expectations have now been pushed back and many expect a September cut. In Canada, while headline inflation edged up slightly to 2.9% in March from 2.8% the month prior, it was the consecutive cooling in core inflation measures that solidified expectations for a June move. Following that encouraging inflation result, market-implied odds for a June interest rate cut by the Bank of Canada rose to 75% from a 60% probability the day before. While similar narratives are playing out in the U.K. and Europe, the U.S. economy has been diverging. The latest U.S. indicators suggest an economy coming under strain from elevated interest rates and resulting in weaker than anticipated GDP growth in Q1 2024, all the while inflation continues to accelerate.
As markets became increasingly unsure of interest rate cuts in 2024 by the Federal Reserve, the 10-year U.S. Treasury bond yield has surged in response and consequently also lifted the Canada 10-year bond yield in tandem. So despite the overnight policy interest rate on track to fall in Canada, the 10-year yield has risen nearly 40 bps this month to 3.9%, nearing the last high seen late last year. Given the 10-year bond yield is the more material measure of debt for commercial real estate, this once again fosters a more challenging real estate investment market in Canada.
Another potential challenge is the recently announced changes to the capital gains tax in the federal government’s 2024 budget. By materially increasing the tax burden on capital gains from selling assets such as office buildings and shopping plazas, this new rule exacerbates the already tough investment conditions for commercial real estate and potentially causes buyers to delay their decisions. Long term, this tax increase could undermine Canada’s competitiveness and impair capital investment, further hindering Canada’s declining economic productivity. However, the Canadian commercial real estate sector continues to see strong underlying growth fundamentals and Canada still remains appealing on the global stage.
Economic Highlights:
- Headline inflation rose slightly to 2.9% in March 2024, while core measures CPI-Trim and CPI-Median slowed further to 3.1% and 2.8%, respectively.
- Advanced estimates indicate retail sales remained flat in March 2024 following the 0.1% decline in February 2024.
- Employment fell marginally by 2,200 jobs in March 2024 and the unemployment rate rose to 6.1%.
Viewpoints:
- Canada heading for divergent interest rate path from U.S.
- GDP growth slowed to a 1.6% rate in the first quarter, well below expectations
- Uncertainty in Canada's tax landscape could weigh on investment: economist
- How Canada’s Capital Gains Tax Hike Could Impact Real Estate Investment
- Canada’s per capita output drops 7% below trend, new Statscan report says
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