Benjamin Tal on Canada’s Economy and Real Estate

Benjamin Tal gave a  talk to the Real Estate Investment Network at a monthly meeting in June 2008. (Thanks to Radley at the Calgary Market Blog for pointing this out) This is the type of stuff I love, and it’s exactly why I’m a REIN member. There’s a lot of really solid analysis here, and some great information on both the U.S. and Canadian economies. Benjamin Tal is a Senior Economist at CIBC World Markets, and he’s a good friend of REIN. (His slides are also pretty decent.)

I’ve had to remove the videos, but I’m going to leave my comments here. If you’re heard his talk, either in person or on the CD’s they send out to REIN members who couldn’t make the meeting, then this will make a lot of sense.

The key takeaways?

“We are entering into a balanced market…building fundamentals for the next rise.”

“We don’t have a recession, we don’t have a bubble.”

“I believe that inflation is going to be the issue.”

“The story for 2009 is inflation and higher interest rates.”


Edmonton is correcting for momentum, not a bubble in prices. It’s a good decline, and not what we saw in the U.S.

The American economy is slowing, but consumers are still spending, although slowing. With 2.5% increase…when they’re happy, they spend; when they’re depressed, they spend even more. Even with the economy and real estate issues, they’re still spending, and this is why they may avoid a true recession.

US subprime space houses fell ~14% November 2006 over 2007, whereas high-tier fell only 6%….sub prime prices have a lot further to fall. Ben suggested as much as 40% in total….that’s another 25% left to fall in the US.

Mortgage reset, or what happens when a discounted sub-prime mortgage jumps up to the real rate, is no longer the issue. The Fed, by cutting rates, has been reducing the reset shock. They’re also providing liquidity through more emergency lending capacity. Bernanke’s PhD thesis was on the 1929 depression and he concluded that it was caused or helped by a monetary policy error that reduced liquidity in the market. The same thing happened in Japan. When the market needs help, you should cut interest rates and provide liquidity. He wants to avoid the same mistake as almost every major recession. However, Tal thinks he’s planting the seeds for inflation in 2009….but you should still do it. You’ve got to help the system now, and deal with the inflation later.

Stock prices tend to rise on days with write-down announcements. Prices go up when the market things ‘I expected it to be more’. Why? Because it’s about what the market is expecting, and this one is expecting a lot of bad news. Ben thinks maybe too much bad news. After all, bad news sells newspapers….

Canada is economically outperforming the US because we’ve avoided the meltdown in real estate and stock prices. Lots of the lift is due to commodity prices. It’s very possible that Ontario is toying with recession. We’ve lost 300,000 over the last several years.

The good news is the manufacturing sector isn’t large enough in terms of GDP contribution to pull the whole economy down. Even just in Ontario it’s not as big as it used to be. The west will continue to outperform.

52% of investible oil reserves globally are in Canada. By 2009, oil sands will be the largest source of new oil on the planet. Oil sands are going to be a global resource, not a local resource. I’m interested to hear exactly what Ben means by this, and how it’s important to monetary policy. He points out that BRICA demand is causing the rise in oil prices, not speculation or the US dollar. And BRICA is driving global economic growth.

Food prices, energy prices and the corn-ethanol issue have created a series of ingredients which may make a nice big inflation-cake in the next few years.

The only thing that ethanol will fuel is inflation.
                                                           – Benjamin Tal, CIBC World Markets

Globalization is vulnerable because of the exceeding high transport costs, which are very sensitive to energy costs.

Core inflation is a measure that has more stability, and during Nixon’s time it was a reasonable measure. It’s inflation without energy and food prices. However, now it’s not volatility in food and energy prices, but more a structural change, or disequilibrium in those prices.

Food inflation didn’t occur much in Canada, but that’s because of the dollar. For that to continue the dollar would have to appreciate 20% and that’s not going to happen. We can expect food prices to rise, similar to the US.

The mortgage market in Canada is very strong. If you look at the numbers, the people who use the 40 year amortization mortgages can actually afford the 25 year products. We use it in the right way, which is to say, not the American way, but more like a line of credit. (A side note for American readers: mortgage terms in Canada are only usually a maximum of 5 years, rather than the insanely long terms you see down south.)

When things go up 40, 50 or 60% per year, you have to expect there’s going to be a breath. We’re avoiding a bubble because we have these deep breaths, or rests. Mortgage arrears are at record lows, and not even close to the US.

What does inflation mean for real estate? It’s not a bad thing, because real estate is a solid asset, and inflation, as a long term item, is good for real estate. We’re not talking about seeing hyper-inflation or double-digit inflation, but 3-4% inflation.

Related posts


  • A

    Hi Mike,

    There’s a bit more to the story of oil prices, not the least of which is the dollar having returned to a more normal level. Since oil trades in USD, the effective price of oil isn’t as low as it appears. Second, many of the oilsands upgrader projects are profitable at $40/barrel and almost all at $60/barrel. Third, the upgrader projects that have been put on hold are suffering only from a lack of available capital for merchant projects; not any long-term issue with the economic fundamentals. These companies make investments in infrastructure based on 20-40 year trends, and today’s price of oil has nothing to do with it.

    Alberta’s Real Estate prices might ‘take a hit’ over the short term, but in the 3-5 year outlook it’s strong growth again.

  • Oil is going to be falling for quite a while. The high prices have sent the market signals to expand production while these same signals make consumers cut back. Real Estate Prices in Alberta look to take a hit as Alberta is so reliant on oil. I’m a Yaletown Realtor and what we are hearing in BC is that oil royalties are set to fall for the BC gov’t.